Wn3J 


BEFORE  THE 


Interstate  Commerce  Commission. 


LN  THE  MATTER  OF  CONSOLIDATIONS  AND  COMBINA- 
TIONS OF  CARRIERS,  RELATIONS  BETWEEN  SUCH  CAR- 
RIERS, AND  COMMUNITY  OF  INTERESTS  THEREIN, 
THEIR  RATES,  FACILITIES  AND  PRACTICES. 


Washington,  D.  C,  April  4  and  5,  1907. 


Fromk  B.  Kellogg  and  C.  A.  Severance^  for  the  Commission. 
R.  S.  Lovett  and  John  G.  Mil^urn^  for  the  Union  Pacific  Railroad 
Company. 
Paxil  D.  Cravath^  for  Otto  H.  Kahn  and  others. 


3568—07 


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3ES 
Un3ll 


Z  INDEX. 

^  Arguments  of —  Page. 

^               Paul  D.  Cravath,  esq 5 

X               R,  S.  Lovett  esq 41 

«=)              John  G.  Milburn,  esq 102 

C.  A.  Severance,  esq 128 

"-^              F.  B.  Kellogg,  esq 164 

'^  3568—07  M 1  (i) 

> 


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■    «-     »•    w   ^ 


BEFORl:   THE    INTERSTATE    COMMERCE 
COMMISSION. 


In  the  Matter 

OF   THE 

Consolidation  and  Combination  of 
Carriers,  Relations  between  such 
Carriers,  and  Community  of  In- 
terest Therein,  their  Rates,  Facili- 
ties, and  Practices. 


Washington,  D.  C,  April  ^,  1907—10  a.  m. 
Present : 

Commissioners  Clements,  Clark,  Lane,  and  Harlan. 

Frank  B.  Kellogg,  esq.,  and  C.  A.  Severance,  esq.,  for 
the  Commission. 

R.  S.  Lovett,  esq..  John  G.  Milburn,  esq.,  for  the 
Union  Pacific  Railroad  Compan3\ 

Paul  D.  Cravath,  esq.,  for  Otto  H.  Kahn  and  other 
witnesses. 


Commissioner  Clements.  Gentlemen,  we  are  here 
this  morning  to  proceed  with  the  further  investigation 
of  the  matter  of  the  consolidation  and  combination 
of  the  carriers,  relations  between  such  carriers,  and 
community  of  interest  therein,  their  rates,  facilities/ 
and  practices,  which  has  been  heard  heretofore  at  sev- 
eral places ;  and  the  understanding  at  the  last  hearing 
was  that  such  further  testimony  as  either  party  wanted 
to  present  at  this  time  would  be  brought  in.     Now 

(1) 


we  desire  to  ask  whether  there  is  anything  further  to 
present  on  the  side  of  the  Government  ? 

Mr.  Severance.  We  have  nothing  further,  your 
honors. 

Commissioner  Clements.  Gentlemen,  have  you  any- 
thing further  to  offer  on  behalf  of  the  railroads? 

Mr.  LovETT.  Yes,  your  honor.  I  suppose,  if  your 
honors  please,  that  the  Commission  takes  knowledge 
of  its  own  records  and  files,  but  I  should  like  to  read  into 
the  record,  as  a  part  of  the  testimony  in  this  case, 
certain  facts  disclosed  by  the  annual  reports  of  the 
Southern  Pacific  Company,  the  Union  Pacific  Railroad 
Company,  and  the  Oregon  Short  Line  Railroad  Com- 
pany, made  to  this  Commission.  The  secretary  has 
these  reports. 

Commissioner  Clements.  Yes;  we  consider  those 
matters  in  evidence  in  all  these  cases;  but  we  desire 
that  anything  that  is  to  be  used  shall  be  specifically 
pointed  out,  so  that  all  parties  may  understand  the 
purposes  for  which  it  is  to  be  used.     You  may  proceed. 

Mr.  Severance.  Just  one  moment,  Mr.  Lovett.  There 
is  one  thing  that  has  been  overlooked. 

Mr.  Kellogg.  In  the  testimony  taken  in  San  Fran- 
cisco, Mr.  Lovett  was  to  furnish  the  agreement  be- 
tween the  Atchison,  Topeka  &  Santa  Fe  Railway  Com- 
pany, the  Southern  Pacific,  and  the  Farmers*  Loan 
and  Trust  Company  as  to  the  joint  ownership  of  the 
Northwestern  Pacific  Railroad  Company.  There  are 
three  agreements  here,  and  they  have  been  furnished. 
I  thought  perhaps  it  would  be  well  enough  for  them 
to  be  marked,  so  as.  to  be  identified. 

Commissioner  Clements.  They  will  be  filed  and 
marked. 

(The  papers  referred  to  are  filed  herewith,  marked 
"  Exhibits  .Lovett  No.  1 ;  Lovett  No.  2 ;  and  Lovett 
No.  3.") 

Mr.  Kellogg.  That  is  all. 

Mr.  Lovett.  I  wish  to  have  noted  on  the  record  that 
the  reports  made  to  this  Commission  bj^  the  Union 
Pacific  Railroad  Company  for  the  years  ending  June 


0^^f2^^ 


30,  1901,  and  June  30,  1902,  show  on  page  37,  in 
the  schedule  of  securities  owned,  the  ownership  by 
that  company  of  750.000  shares  of  the  common  stock 
of  the  Southern  Pacific  Company  at  the  close  of  the 
fiscal  year  ending  June  30,  1901,  and  900,000  shares, 
or  $90,000,000,  at  the  close  of  the  fiscal  year  ending 
June  30,  1902. 

I  also  ask  that  it  be  noted  on  the  record  that  the 
reports  of  the  Oregon  Short  Line  Railroad  Company 
for  the  fiscal  years  ending  June  30,  1903,  1904,  1905, 
and  190G,  show  on  page  37,  in  the  schedule  of  securities 
owned,  that  that  company,  at  the  close  of  the  fiscal  year 
ending  June  30,  1903,  owned  $90,000,000,  or  900,000 
.-hares,  of  the  common  stock  of  the  Southern  Pacific 
Company.  Also  that  for  the  fiscal  year  ending  June 
30,  1905,  and  the  year  ending  June  30,  1906,  the  same 
company  owned  $18,000,000,  or  180,000  shares,  of  the 
preferred  stock  of  the  Southern  Pacific  Company. 

I  ask  also  that  it  be  noted  on  the  record  that  the  same 
reports  of  the  same  companies  for  the  same  years — 
that  is,  the  fiscal  yenrs  ending  June  30,  1901,  1902, 
1903,  1904,  1905,  and  190C,  on  page  7  of  the  report- 
show  the  common  officers  of  the  two  companies,  par- 
ticularly the  Union  Pacific  and  Southern  Pacific;  that 
it  appears  from  that  page  of  those  reports  that  J.  C. 
Stubbs  was  traffic  director  of  all  these  companies  dur- 
mg  all  those  years;  that  in  1901  E.  H.  Harriman,  who 
was  then  chairman  of  the  executive  committee  of  the 
Union  Pacific  Railroad  Company  and  the  Oregon  Short 
Line  Railroad  Company,  became  president  and  chair- 
man of  the  executive  committee  of  the  Southern  Pacific 
Company,  and  that  has  been  shown  in  the  annual  reports 
for  every  year  since.  In  1904  it  appears  that  he  be- 
came president  of  the  Union  Pacific  Railroad  Com- 
pany, and  was  prior  to  that  and  has  ever  since  been 
president  of  the  other  two  companies  named — that  is, 
the  Southern  Pacific  Company  and  the  Oregon  Short 
Line — that  also  in  1904  J.  Kruttschnitt  became  di- 
rector of  maintenance  and  operation  of  all  of  those 
companies. 


I  have  prepared  here  a  memorandum  showing  the 
common  officers  as  taken  from  that. 

Mr.  Severance.  I  think  it  is  all  in  the  record  now, 
is  it  not  ? 

Mr.  LovETT.  I  do  not  think  it  is,  as  to  the  time. 

Mr.  Severance.  Possibly  not  for  all  the  years. 

Mr.  LovETT.  But  whether  it  is  of  record  or  not,  I 
want  to  show  that  these  facts  were  shown  in  the  annual 
reports  filed  with  the  Commission  for  all  those  years. 

Mr.  Severance.  Was  not  Mr.  Young  shown,  too? 

Mr.  LovETT.  I  think  he  was.  There  were  a  number  of 
common  officers  there  at  that  time. 

!Mr.  Severance.  Young  is  not  included  in  this.  This 
is  not  supposed  to  include  all  the  common  officers. 

Mr.  LovETT.  I  would  like  to  have  it  appear,  in  ad- 
dition to  the  statement,  that  Young  was  general  au- 
ditor of  all  those  companies.  Of  course,  I  offer  those 
pages  of  the  report  of  each  of  those  companies  which 
would  show  all  the  common  officers. 

Commissioner  Clements.  Whatever  they  show  would 
be  in  evidence.  This  is  a  mere  memorandum  pointing 
out  the  pages  referred  to,  as  I  understand  it. 

Mr.  LovETT.  Yes.  I  also  introduce  page  5  of  the 
record  of  each  of  those  companies  for  the  same  years, 
showing  the  common  officers  and  common  directors  of 
the  various  companies  named;  showing  that  for  the 
jears  mentioned  the  majority  of  the  directors  of  the 
Southern  Pacific  Company  were  also  directors  of  the 
Union  Pacific  Railroad  Company. 

(The  paper  referred  to  was  marked  "  Lovett  Xo.  4.'"') 

I  also  introduce  a  copy  of  the  mortgage  of  the 
Southern  Pacific  Company  to  the  Union  Trust  Com- 
pany, dated  August  1,  1899,  which  shows  that  every 
share  of  the  capital  stock  of  the  Central  Pacific  Rail- 
way Company  is  owned  by  the  Southern  Pacific  Com- 
pany and  pledged  as  collateral  for  that  mortgage. 

Connnissioner  Clements.  That  will  be  marked  as  an 
exhibit. 

(The  paper  referred  to  is  filed  herewith,  marked  "Ex- 
hibit Lovett,  Xo.  5.") 


Mr.  Lo\TETT.  I  believe  that  is  all. 

Commissioner  Clesients.  Now,  gentlemen,  we  have 
been  requested,  as  we  understand  it,  by  Judge  Lovett 
and  other  associate  counsel  in  this  case,  to  hear  an  argu- 
ment, and  we  are  also  to  hear  that  now.  You  may  pro- 
ceed in  your  own  way  and  in  the  order  which  you 
choose. 

ARGUMENT  OF  PAUL  D.  CBAVATH,  ESQ., 
Representing  Otto  H.  Kahn  and  other  witnesses. 

Mr.  Cravath.  May  it  please  the  Commission,  I  will 
say  a  few  words  regarding  the  Chicago  &  Alton  trans- 
actions. I  take  it  that  the  primary  purpose  of  this  Com- 
mission in  investigating  the  so-called  recapitalization 
of  the  Chicago  &  Alton  Railroad  Company  was  to  as- 
certain the  basis  of  the  issue  of  the  Chicago  &  Alton 
securities  which  are  now  outstanding  and  the  character 
and  value  of  the  property  which  those  securities  repre- 
sent. Xo  one  can  doubt  that  that  is  a  perfectly  fair  and 
legitimate  subject  of  inquiry  by  the  Interstate  Com- 
merce Commission. 

It^ems,  however,  that  the  testimony  regarding  these 
transactions  has  resulted  in  verj'  widespread  misappre- 
hension regarding  the  real  nature  of  these  transactions, 
certainly  on  the  part  of  the  public  and  perhaps  on  the 
l)art  of  the  Commission.  I  shall  therefore  discuss  some 
of  the  phases  of  these  transactions,  at  the  risk  of  per- 
haps.going  beyond  what  would  ordinarily  be  the  scope 
of  an  inquiry  by  the  Interstate  Commerce  Commission. 
As  I  shall  devote  most  of  my  time  to  explaining  what 
(  think  those  Chicago  &  Alton  transactions  are  not,  it 
will  perhaps  clear  the  situation  at  the  outset  if  I  show 
what  I  believe  they  are. 

There  can  be  no  doubt  that  one  of  the  purposes  and 
one  of  the  results  of  the  series  of  transactions  which  I 
shall  briefly  call  the  Chicago  &  Alton  recapitalization 
was  to  reduce  the  cost  to  the  syndicate  of  the  97  per  cent 
of  the  Chicago  &  Alton  stock  which  they  had  purchased 
for  approximately  $39,000,000.  There  is  no  doubt  at  all 
that  that  was  one  of  the  purposes  of  this  series  of  trans- 


6 

actions,  and,  I  shall  contend  later,  an  entirely  proper 
purpose. 

There  is  no  doubt,  in  the  second  place,  that  another 
purpose  and  effect  of  this  recapitalization  was  to  create 
securities  the  aggregate  par  value  of  which  exceeded  the 
intrinsic  demonstrated  value  of  the  property  at  the  time 
those  securities  were  created.  By  intrinsic  value  I 
mean  the  cash  cost  or  the  value  which  could  be  ascer- 
tained by  an  appraisal  of  the  physical  property.  By 
demonstrated  value  I  mean  the  value  which  could  be 
demonstrated,  first,  by  an  appraisal  of  the  physical  prop- 
erty, and,  second,  by  the  past  achievements  of  the  prop- 
erty in  respect  to  earnings.  A  portion  of  these  new 
securities,  chiefly  the  common  stock,  as  I  shall  point 
out,  represented  the  future  of  the  property — the  added 
value  which  was  expected  to  result,  and  which  I  believe 
to  a  gi-eat  extent  did  result,  from  the  application 
of  new  methods  and  on  account  of  the  growth  of  the 
country. 

Xow,  if  it  should  be  the  view  of  this  Commission  that 
such  transactions — the  class  of  transactions  of  which 
the  Chicago  &  Alton  recapitalization  is,  as  I  shall  con- 
tend, a  fair  example — should  be  regulated  by  law, 
and  that  in  the  future  the  issue  of  securities  under 
such  conditions  should  either  not  be  permitted  or 
should  be  permitted  only  under  the  guidance  of  this 
Commission  or  of  a  proper  body  of  public  officials,  I 
should  have  no  quarrel.  I  think  any  fair-minded  man 
must  recognize  that  under  existing  conditions  there  is  a 
call  for  a  closer  regulation  of  the  issue  of  securities  by 
semi-public  corporations  than  has  heretofore  been  the 
case.  And  yet  w«  must  not  forget  the  conditions  that 
existed  when  these  securities  were  issued.  I  think  any 
student  of  the  development  of  American  industries, 
and  particularly  of  American  railroads,  must  agree 
that  the  liberality  of  our  laws  with  respect  to  the 
issue  of  securities  and  the  creation  of  stocks  and  bonds 
has  been  of  the  utmost  importance  in  aiding  in  the 
development  of  this  country.  I  think  it  is  very  clear 
that  had  we  had  in  this  country  during  the  past  twenty- 
five  years  the  strict  laws  which  now  exist  in  England 


and  in  most  European  countries — the  stricter  laws 
which  it  is  now  proposed  to  enact  in  many  States — a 
very  substantial  part  of  the  development  of  our  country 
iind  the  development  of  our  new  industries  would  have 
been  impracticable;  so  that  the  so-called  vHce  of  stock 
watering  has  been  in  many  cases  a  real  virtue,  a  real 
aid  to  the  development  of  the  country.  Perhaps  a  law- 
yer in  arguing  a  case  has  no  right  to  express  his  views 
on  questions  of  economic  policy,  but  I  for  one  quite 
agi"ee  that  the  time  has  come  in  the  development  of  our 
country  when  in  balancing  advantages  and  evils  the 
advantage  would  be  in  favor  of  a  much  stricter  regu- 
lation of  the  issue  of  stocks  and  bonds  and  much  greater 
conservatism  enforced  by  law  than  has  prevailed  in  the 
past  in  these  regards.  But  throughout  my  brief  dis- 
cussion I  shall  ask  you  to  bear  in  mind  that  we  are 
dealing  with  the  period  which  immediately  followed  the 
depression  of  1893 — the  period  of  the  most  remarkable 
development  in  the  history  of  our  country  in  industries 
and  railroads  and  new  enterprises  generally — when 
very  different  standards  were  being  applied  from  those 
applied  now,  and  when  many  things  were  not  only  per- 
missible, but  were  approved,  which,  under  existing  con- 
ditions and  under  the  conservative  influences  which 
have  come  from  success  and  from  our  rapid  develop- 
ment, are  now  regarded  at  least  as  unwise.  And  bear 
in  mind,  gentlemen,  that  these  transactions  took  place  at 
the  height  of  that  period  of  rapid  development. 

As  I  shall  deal  with  figures,  I  shall  follow  my  brief 
very  closely;  and  in  connection  with  my  brief,  which 
I  have  endeavored  to  make  as  short  as  possible,  I  sub- 
mit a  report  of  Mr.  J.  H.  McClement,  an  eminent  rail- 
road expert,  upon  the  Chicago  &  Alton  recapitalization. 
The  primary  purpose  of  that  report  is  to  place  l)efore 
you  in  condensed  form  a  great  deal  of  information  re- 
garding comparative  railroad  finance,  which  I  think 
may  be  of  use;  and  I  take  it  that  on  questions  such  as 
I  am  now  discussing,  Avhich  permit  no  formal  order, 
you  will  feel  free  to  take  advantage  of  any  information 
of  such  a  character  which  may  be  made  available. 

At  the  outset  let  me  say  that  there  are  three  important 


8 

facts  which  seem  not  to  be  understood  bv  the  public  at 
least,  and  which  I  think  should  be  borne  in  mind 
throughout  the  consideration  of  these  Chicago  &  Alton 
transactions. 

In  the  first  place,  Messrs.  Harriman,  Gould,  Schitl'. 
and  Stillman  were  not  the  sole  owners  of  the  97  per 
cent  of  the  capital  stock  of  the  Chicago  &  Alton 
Railroad  Company  which  was  purchased  in  their  name 
in  1899.  That  stock  was  acquired  for  and  owned  by  a 
syndicate  of  over  a  hundred  indi\dduals,  firms,  and  cor- 
porations, which  included  these  four  men.  but  only  to 
a  comparatively  moderate  amount.  So  that  throughout 
all  these  transactions  there  were  over  a  hunclred  stock- 
holders of  the  Chicago  &  Alton  Railroad  Company  who 
were  represented  by  these  four  men  in  whose  name  the 
legal  title  to  the  stock  stood.  The  impression  seems  to 
be  that  these  transactions  were  for  the  sole  benefit  of 
these  four  gentlemen. 

The  second  fact  is  this:  All  the  benefits  of  these 
transactions  from  beginning  to  end  were  shared  equally 
by  all  the  stockholders — not  only  by  the  hundred  or 
more  stockholders  represented  by  the  four  gentlemen 
named,  but  also  by  the  holders  of  the  3  per  cent  of  the 
stock  which  was  not  sold  in  response  to  Mr.  Mitchell's 
circular.  There  is  no  suggestion  of  freezing  out ;  there 
is  no  suggestion  of  injustice.  Every  dollar  of  profit 
was  divided  pro  rata  among  all  the  stockholders  who 
participated  in  this  plan. 

In  the  third  place,  the  impression  seems  to  exist  that 
your  investigation  has  laid  bare  secrets ;  that  discoveries 
have  been  made.  As  a  matter  of  fact,  as  I  think  you 
will  be  convinced  by  a  study  of  the  record,  all  the  trans- 
actions in  question  were  carried  through  in  the  most 
public  manner.  Every  important  fact  brought  out  by 
the  recent  investigation  had  been  made  public  through 
reports  and  circulars  to  stockholders  and  other  publica- 
tions, and  at  all  times  since  these  transactions  took  place 
full  information  regarding  the  manner  of  issuing  and 
distributing  the  securities,  the  prices  at  which  they  were 
sold,  the  30  j^er  cent  dividend,  and  the  basis  of  the 
recapitalization  of  the  Chicago  &  Alton  Company  could 


be  obtained  by  application  to  any  intelligent  banker  or 
broker,  or  by  consulting  Poor's  Manual  or  any  of  the 
numerous  manuals  or  other  publications  which  are  pub- 
lished for  the  information  of  investors. 

In  Appendix  B  to  my  brief  you  will  find  a  summaiy 
of  some  of  the  publications  which  furnished  public  in- 
formation regarding  each  step  in  the  transaction.  For 
instance,  take  the  third,  the  sale  of  $82,000,000  of  3  per 
cent  bonds  of  the  railroad  company  at  Go.  Information 
regarding  that  transaction  could  be  found  in  the  listing 
a])plications  to  the  New  York  Stock  Exchange  which 
are  published  and  in  the  hands  of  every  broker;  the 
Manual  of  Statistics  for  1900  and  1901,  Moody's  Man- 
ual of  1901,  the  Commercial  and  Financial  Chronicle; 
and  in  various  circular  letters,  etc.,  issued  by  the  com- 
pany. The  information  was  as  public  and  as  easily 
accessible  as  information  of  that  character  could  pos- 
sibly be. 

You  are  so  familiar  with  these  transactions  that  it  is 
unnecessary  for  me  to  attempt  to  restate  in  detail  what 
they  were.  I  shall  therefore  take  up  a  few  of  the 
steps  or  incidents  in  these  transactions  which  seem  to 
me  to  have  resulted  in  the  most  serious  misunderstand- 
ings, and  give  you  my  views  regarding  them. 

The  first  is  the  sale  to  the  stockholders  of  the  Chicago 
&  Alton  Railroad  Company  of  $82,000,000  of  8  per 
cent  bonds  at  (55.  You  remember  that  very  shortly  after 
the  syndicate  acquired  97  per  cent  of  the  stock  of  the 
company  the  directors  and  stockholders  authorized  an 
issue  of  $40,000,000  of  8  per  cent  bonds,  and  that  of 
those  bonds  $82,000,000  were  sold  to  the  stockholders 
pro  rata  at  65. 

In  the  first  place.  I  take  it  that  all  will  agree  that  at 
that  time  in  the  history  of  the  development  of  the  Chi- 
cago &  Alton  Company's  atfairs  some  issue  of  new  se- 
curities was  necessary.  The  funded  debt,  carrying  G 
and  7  per  cent  interest,  was  to  mature  in,  I  think,  about 
two  yeai-s,  and  had  to  be  refunded.  All  agree  that  if 
the  road  was  to  keep  its  place  among  the  important 
railroads  of  the  Middle  West,  very  substantial  provision 
would  have  to  be  made  for  new  improvements.     Clearly 


10 

some  issue  of  new  securities  was  needed,  and,  I  take  it, 
no  one  will  question  the  propriety  of  the  action  of  the 
company  in  authorizing  this  issue  of  $40,000,000  of 
bonds.  So  that  the  only  question-in  this  connection  is 
as-  to  the  propriety  of  the  sale  of  $32,000,000  of  these 
bonds  to  the  stockholders  at  65. 

Let  me  point  out  first,  what  surprised  me,  I  confess, 
that  the  sale  of  fifty-year  3  per  cent  bonds  at  65  is  rais- 
ing money  on  a  4^  per  cent  basis,  the  discount  on  the 
bonds  being  distributed  throughout  the  period  of  the 
bonds.  In  other  words,  the  practical  result  is  the  same 
as  though  the  company  had  sold  5  per  cent  bonds  at 
substantially  par;  and  I  doubt  very  much  if  anybody 
would  have  questioned  the  distribution  of  5  per  cent 
bonds  at  par  among  the  stockholders,  especially  in  the 
case  of  a  corporation  like  the  Chicago  &  Alton,  which 
had  such  large  earnings,  and  the  value  of  whose  prop- 
erty was  so  much  in  excess  of  the  par  value  of  its  stock, 
even  though  the  5  per  cent  bonds  thus  distributed  might 
have,  in  the  hands  of  the  stockholders,  been  worth  120 
or  even  130. 

Bear  in  mind  that  it  was  the  stockholders  who  re- 
ceived the  benefit.  That  is  the  important  fact,  that 
this  sale  of  3  per  cent  bonds  at  65  was  made  to  the 
stockholders  pro  rata. 

It  is  true  that  by  reason  of  the  low  rates  of  interest 
which  prevailed  in  1900  and  by  reason  of  the  fact  that 
these  bonds  became  savings  bank  investments  in  the 
State  of  Xew  York  Avhen  bonds  of  that  character  were 
very  keenly  in  demand,  about  half  of  these  bonds — to 
be  accurate,  $17,000.000 — were  sold  at  surprisingly 
high  prices,  90  or  above,  and  an  unexpectedly  large 
profit  was  made  on  them.  But  that  profit.  Avhatever 
it  was,  was  shared  by  the  stockholders  pro  rata.  In  this 
connection  it  may  be  pointed  out  that  about  half  of 
those  bonds  were  finally  distributed  among  the  stock- 
holders participating  in  the  syndicate;  and  those  who 
kept  their  bonds  as  investments,  and  have  them  to- 
day, have  a  very  small  profit. 

Mr.  Severance.  Is  that  in  evidence  ? 


11 

Mr.  Cravath.  The  record  shows,  as  I  remember  it, 
that  $17,000,000  of  those  bonds — perhaps  the  amount 
does  not  appear — but  that  a  substantial  proportion 
were  distributed.  That  appears  in  Mr.  Kahn's  testi- 
mony. 

Mr.  Ix)^-ETT.  I  think  it  was  $14,000,000. 

Mr.  Cravath.  Yes.  I  think  the  bonds  to-day,  as  a 
matter  of  common  knowledge,  are  selling  at  about  78  or 
79;  that  is,  they  have  adjusted  themselves  to  the  change 
in  the  prevailing  rates  of  interest.  Instead  of  being 
upon  a  3^  per  cent  basis,  as  they  were  in  those  days, 
they  are  now  upon  a  4^  per  cent  basis. 

Now,  again,  let  me  ask  you  to  test  the  propriety  of 
the  issue  of  these  bonds  at  65  by  the  standards  which 
existed  at  the  time  they  were  issued.  At  that  time,  and 
for  decades  before,  the  issue  of  stocks  and  bonds  to 
stockholders  pro  rata^  at  less  than  their  market  value 
was  an  exceedingly  common  and  generally  approved 
practice;  and  it  is  only  within  two  or  three  years  that 
the  change  of  view  regarding  such  transactions  has 
taken  place.  Up  to,  I  should  say,  three  years  ago,  I 
for  one  never  heard  any  criticism  of  a  reasonable  dis- 
tribution of  the  stocks  or  bonds — the  stocks  being  more 
frequent  than  bonds — among  stockholders  at  a  price 
substantially  below  the  market  value.  That  was  the 
favorite  or  usual  expedient  for  raising  money  among 
large  railroad  corporations  in  the  past. 

In  Mr.  McClement's  report  you  will  find  many  ex- 
amples of  such  issues  at  approximately  that  time.  For 
instance,  in  April,  1899,  a  few  months  before  this 
Chicago  &  Alton  issue,  the  Chicago,  Burlington  & 
Quincy  Railroad  Company,  a  conservatively  managed 
company,  issued  to  its  stockholders  over  $16,000,000  of 
JH  per  cent  bonds  at  75,  which  immediately  upon  their 
issue  sold  above  par,  and  I  am  informed  that  there  was 
not  a  word  of  criticism  of  that  transaction. 

Go  further  back,  to  1883,  when  Mr.  Kellogg  and  Mr. 
Severance  and  I  were  boys  in  Minnesota.  In  that 
year  the  St.  Paul,  Minneapolis  &  Manitoba  Railroad 
Company  sold  an  issue  of  6  per  cent  bonds  at  10;  dis- 


12 

tribiited  that  issue  among  its  stockholders  at  10.  It 
adopted  that  means  of  raising  a  moderate  amount  of 
money  and  of  distributing  a  surplus  among  the  stock- 
holders. That  transaction  provoked  no  comment  at 
that  time.  I  think  it  would  have  provoked  comment 
ten  years  ago.  Those  bonds,  by  the  way,  were  6  per 
cent  bonds,  and  immediately  after  their  issue  sold 
above  par. 

The  records  are  full  of  cases  of  this  character,  so  that 
I  think  that  there  can  l^e  no  doubt  that  in  distributing 
these  securities  among  stockholders  at  Go  the  Chicago 
&  Alton  was  pursuing  a  well-recognized  and  honorable 
method  of  raising  money  and  distributing  a  l^enefit 
among  its  stockholders. 

We  have  this  additional  justification,  that  the  com- 
pan}'  had  a  large  surplus,  which  I  shall  discuss  later,  a 
surplus  of  over  $1-1:,000,000,  and  that,  of  the  discount  on 
those  bonds,  $8,155,000  was  charged  against  that  sur- 
plus. That  was  not  necessary.  A  corporation  has  the 
right  undoubtedly  to  distribute  the  discount  on  bonds 
over  the  entire  period  of  the  bonds.  That  is  clearly 
permissible  and  proper  under  the  rules  of  accounting; 
but  they  chose  to  absorb  $8,155,000  of  that  discount  by 
charging  it  against  the  surplus.  And,  let  me  say,  there 
is  no  foundation  for  the  suggestion  that  it  was  for  the 
purpose  of  concealing  the  discount  at  which  those  bonds 
were  sold.  The  fact  that  those  bonds  were  sold  at  65 
to  the  stockholders  was  just  as  public,  was  just  as  well 
known,  as  a  fact  regarding  the  management  of  a  big 
railroad  corporation  could  be.  Everybody  knew  it. 
It  was  published  day  after  day  in  a  great  variety  of 
forms,  and  it  never  would  have  occurred  to  anyone  to 
conceal  the  fact.  The  purpose  undoubtedly  of  charg- 
ing $8,155,000  of  the  discount  against  the  surplus  was 
that  it  was  recognized  that  the  issue  of  those  bonds  at 
65,  which  was  less  than  their  market  Aalue,  was  an  in- 
direct distribution  of  surplus  among  the  stockholder. 

You  will  see  from  what  I  have  alreadj'  said  that  there 
was  not  the  slightest  danger  of  deceiving  investors  re- 
garding the  bonds.  No  investor  who  took  the  slightest 
pains  to  inform  himself  could  have  been  ignorant  of 


13 

the  fact  that  those  bonds  were  sold  at  65  to  the  stock- 
holders, any  more  than  in  dozens  of  cases  with  which 
yoii  are  familiar,  investors  haVe  any  doubt  that  the 
stock  which  they  are  buying  on  the  market  at  120,  or 
130,  or  140,  or  150  was  distributed  among  the  stock- 
holders at  par.  Does  anybody  doubt,  for  instance,  that 
an}'  investor  in  Pennsylvania  Railroad  stock  in  1903 
knew  perfectly  well  that  when  he  paid  130  for  the  stock 
it  was  distributed  among  stockholders  at  a  lower  price  ? 
Those  facts  are  bound  to  be  known.  They  are  w^idely 
circulated,  and  I  venture  to  say  that  not  a  single  in- 
vestor in  Chicago  &  Alton  bonds  was  misinformed  as  to 
the  price  at  which  those  bonds  were  sold  to  the  stock- 
holders. 

Now  we  come  to  the  next  important  event  in  this 
series  of  transactions,  and  that  is  the  action  of  the 
Chicago  &  Alton 

Commissioner  Clements.  On  that  last  point,  whether 
it  is  lawful  or  unlawful,  forbidden  or  not  forbidden,  is 
not  the  necessary  result  of  that  practice  that  the  present 
owners  of  a  property  are  enabled  to  take  out  a  net  sur- 
plus for  their  immediate  distribution,  and  then  in  effect 
charge  it  up  against  the  freight  payers,  at  least  so  long 
as  the  feeling  prevails  that  a  road  is  entitled,  if  it  can, 
to  earn  from  its  business  enough  to  pay  its  fixed  charges, 
the  interest  on  these  bonds  in  excess  of  anything  that 
was  paid  for — aside  from  anything  that  is  lawful  or 
unlawful,  is  not  that  the  outcome  of  that  practice  ? 

Mr.  Cravath.  To  answer  your  question  indirectly :  I 
quite  agree  that  there  is  ample  basis  for  the  view  that 
the  time  will  come  when  attention  should  be  paid  to 
seeing  that  the  par  value  of  securities  outstanding  bears 
a  definite  relation  to  the  value  of  the  property  against 
which  they  are  issued.  I  think  there  is  no  doubt 
about  that,  I  also  agree  that  so  far  as  the  existing 
situation  is  concerned,  the  par  value  of  outstanding 
securities  is  not  a  safe  guide  as  to  the  earning  capacity 
or  the  intrinsic  value  of  property.  But  it  is  true  that 
the  public  have  understood  that,  and  it  is  remarkable  to 
find  how  nearly  the  market  value  of  securities  corre- 
sponds to  the  real  value  and  the  real  earning  capacity 


14 

of  the  properties.  In  other  words,  the  investor  in- 
quires at  once,  not  what  the  par  value  'of  the  stock  is, 
but  what  the  stock  earns,  and  what  relation  it  bears  to 
the  value  of  the  property  as  shown  by  the  corporation's 
reports. 

Commissioner  Clements.  But  when  you  look  at  it 
from  the  standpoint  of  the  people  who  pay  the  freight, 
who  patronize  the  road  and  pay  the  burdens  of  trans- 
portation— take,  for  instance,  the  case  that  you  referred 
to  a  moment  ago.  where  the  distribution  of  the  bonds 
was  at  10  cents  on  the  dollar,  as  I  understood  you  to 
say,  in  some  case  some  years  ago,  and  when  they  were 
issued  they  soon  became  or  immediately  became  worth 
par  or  more.  That  would  net  immediate  distribution 
among  themselves  of  90  cents 

Mr.  Cravath.  AVell,  except 

Commissioner  Clements.  Equal  to  cash. 

Mr.  Cravath.  In  that  case,  it  is  fair  to  say,  that  was 
an  indirect  distribution  of  surplus.  The  theory  of  that 
distribution  was  that  the  corporation  had  a  surplus,  as 
I  remember  it;  it  had  lines  which  had  been  paid  for 
out  of  earnings,  and  adopted  the  means  of  creating 
those  bonds  to  represent  that  additional  value  as  well  as 
the  $100  per  bond  paid  in. 

Mr.  Kellogg.  What  case  are  you  speaking  of  ? 

Mr.  Cravath.  The  Manitoba  case  in  1883. 

Commissioner  C£ements.  I  only  used  that  as  an 
illustration  of  the  point  I  was  trying  to  present  to  you, 
and  that  is  that  when  a  transaction  of  this  sort  occurs 
and  there  is  a  distribution  of  bonds  among  stockholders 
for  much  less  than  th^y  are  worth  or  will  bring  at  the 
time,  it  amounts  to  a  net  surplus  at  that  time  to  them, 
but  the  property  must  make  it  good  in  earnings:  and 
when  you  get  into  court  on  a  receivership  or  anything 
of  that  kind,  the  interest  on  these  bonds  is  a  fixed 
charge,  and  may  result  in  the  bankruptcy  of  a  road,  or 
if  not,  in  rates  which  would  be  very  high  on  the  basis 
of  the  actual  investment. 

Mr.  Cravath.  I  think  the  test,  Mr.  Commissioner,  is 
this:  A^Tiat  is  the  fair  earning  capacity  and  value  of 
the  property?     And,  having  determined  that,  I  think 


15 

that  the  result,  both  to  the  public  and  to  the  State  and 
to  the  stockholders,  is  the  same,  whether  a  small  amount 
of  securities  carries  a  high  rate  of  interest  or  dividend, 
or  a  larger  amount  carries  a  proportionately  smaller 
rate  of  interest  or  dividend.  Or,  putting  it  differently, 
if  a  corporation  distributes  $2,000,000  a  year,  it  makes 
no  difference  whether  that  is  distributed  by  a  10  per  cent 
dividend  on  $20,000,000  of  stock  or  a  5  per  cent  divi- 
dend on  $40,000,000  of  stock.  But  I  quite  agree  that 
where  securities  do  not  bear  some  definite  relation  to  the 
intrinsic  value  of  the  property,  it  becomes  difficult  in 
many  cases  to  ascertain  what  the  fair  earning  capacity 
is.  and  I  shall  not  differ  with  you  at  all  in  advocating, 
under  existing  conditions,  some  regulation  by  law  as  to 
the  amount  of  securities  which  should  hereafter  be 
issued  against  property  and  against  earning  capacity. 

Now  we  come  to  the  action  of  the  Chicago  &  Alton 
Railway  Company  in  readjusting  its  accounts  and  car- 
rying to  its  surplus,  $12,444,000,  which  during  previous 
years  had  been  taken  from  earnings  and  expended  for 
additions  and  permanent  improvements,  but  in  the  first 
instance — that  is,  from  year  to  year — charged  upon  the 
books  of  the  company,  not  to  capital,  but  to  current 
expenditures. 

I  think  that  all  connected  with  the  company  agree 
that  these  expenditures  in  the  first  instance  could  with 
entire  propriety  have  been  charged  to  capital  account. 
The  witness  Hillard,  the  present  comptroller  of  the 
company  and  the  chief  critic  of  these  transactions  in 
this  investigation,  said :  "  I  have  no  doubt  that  they 
might  have"  been  fairly  so  charged,  at  the  time."  And 
here  I  will  call  attention  to  a  circular  not  in  the  record, 
which  had  not  been  called  to  my  attention  at  the  time 
of  the  investigation,  but  which  I  have  no  doubt  you  will 
be  glad  to  consider  in  connection  with  these  questions 
now  in  issue,  a  circular  issued  by  Mr.  Blackstone  in 
February,  1889,  when  he  was  opposing  the  sale  of  the 
stock  to  the  Harriman  syndicate.  Mr.  Mitchell,  of 
Chicago,  had  made  the  offer  on  behalf  of  the  syndicate 
to  buy  the  stock  at  175  for  common  and  200  for  pre- 
ferred, and  Mr.  Blackstone,  the  president  of  the  com- 
3568—07  M 2 


16 

pany,  'who  for  years  had  been,  as  you  cjoubtless  know, 
the  chief  spirit  in  its  affairs,  while  agreeing  that  the 
offer  should  be  submitted  to  the  stockholders,  opposed 
the  acceptance  of  it  on  the  ground  that  the  price  was 
not  high  enough.  He  thought  that  the  property  was 
worth  more;  and  in  this  circular,  issued  for  the  guid- 
ance of  the  stockholders,  printed  in  full  on  page  7  of 
my  brief,  he  said : 

"  In  my  communication  addressed  to  you,  under  date 
of  31st  of  January,  I  made  certain  statements  with 
reference  to  an  offer  made  by  Mr,  J.  J.  Mitchell  to 
purchase  your  shares.  I  now  wish  to  supplement  that 
statement  by  advising  you  that  in  case  a  majority 
of  the  shares  of  the  company  are  not  sold  to  the  syn- 
dicate represented  by  Mr.  Mitchell  I  shall  advise'  that 
you  authorize  the  refunding  of  the  outstanding  bonds 
of  the  company  and  the  issue  of  a  stock  dividend  to 
represent  earnings  heretofore  invested  in  permanent 
improvements." 

So  we  have  Mr.  Blackstone  on  record,  himself  ad- 
vocating that  these  expenditures  which  his  own  reports 
showed  had  been  made  for  permanent  improvements 
out  of  earnings  should  be  carried  to  capital  account, 
thereby  correspondingly  increasing  the  surplus,  and 
that  from  that  surplus  a  stock  dividend  should  be  de- 
clared to  the  stockholders. 

Thus  we  have  all  these  men  agreeing  that  the  expendi- 
tures were  made  out  of  earnings  for  permanent  im- 
provements, and  we  have  Mr.  Blackstone  agreeing  with 
Mr.  Felton  and  with  the  present  management  that  it 
was  fair  and  proper  to  the  stockholders  that  those  ex- 
penditures should  be  carried  as  surplus  nnd  that  the 
stockholders  should  have  something  to  represent  that 
investment. 

Let  me  point  out.  too,  what  Mr.  Blackstone  said  in 
another  report  in  1894 — that  the  capitalization  of  the 
Chicago  &  Alton  Company,  including  its  bonds  and  all 
obligations  assumed  by  it,  aggregated  less  than  60  per 
cent  •'■  of  the  actual  cost  of  the  property  in  its  present  im- 
proved condition,"  and  that "  a  dividend  " — I  am  quoting 
Mr.  Blackstone's  own  words — "  a  dividend  of  8  per  cent 
is,  therefore,  the  equivalent  of  about  4f  per  cent  upon 


17 

such  a  number  of  shares  as  would,  together  with  the 
funded  debt,  represent  the  actual  cost  of  the  property." 

There  is  another  formal  official  declaration  from  Mr. 
Blackstone  that  the  actual  cost  of  the  property  exceeded 
by  $14,000,000  or  $15,000,000  the  par  value  of  the  se- 
curities outstanding. 

Commissioner  Harlan.  Where  were  you  reading 
from  then,  Mr.  Cravath  ? 

Mr.  Cravath.  At  the  top  of  page  6  of  my  brief.  That 
extract  from  Mr.  Blackstone's  report  is  quoted  in  full 
in  Mr.  Felton's  report  which  is  in  evidence — Mr.  Fel- 
ton's  report  on  the  strength  of  which  the  accounts  were 
readjusted  and  these  expenditures  carried  to  surplus.  I 
have  just  now  read  from  the  top  of  page  C  of  my  brief. 

It  is  rather  interesting  to  note  here,  gentlemen,  that 
on  Mr.  Blackstone's  own  statement  that  the  securities 
represented  but  60  per  cent  of  the  cost  of  the  property 
the  intrinsic  value  of  the  stock  was  about  172.  In  other 
words,  the  syndicate  paid  just  about  what  Mr.  Black- 
stone  estimated  to  be  the  intrinsic  value  of  the  property 
based  on  its  actual  cost,  without  any  provision  for 
accretions  in  value. 

So  I  say  that  all  managements  agree  upon  the  pro- 
priety, wisdom,  and  fairness  of  the  readjustment  of  the 
surplus. 

That  readjustment  is  amply  supported  by  accounting 
authorities.  You  will  find  in  Appendix  A  to  my  brief 
an  opinion  by  Price,  Waterhouse  &  Co.,  Haskins  &  Sells, 
and  J.  H.  McClement,  three  of  the  most  distinguished 
authorities  on  railroad  accounting  that  I  could  find, 
who  all  agree  that  it  is  entirely  proper  for  a  corpora- 
tion after  it  has  for  years  charged  to  current  expense 
expenditures  from  earnings  for  permanent  improve- 
ments which  should  at  the  time  have  been  charged  to 
capital,  subsequently  to  readjust  the  accounts  and  carry 
those  expenditures  to  capital  account,  thereby  increasing 
the  surplus.  I  will  submit  their  original  opinion.  A 
copy  is  found  in  the  Appendix  to  my  brief. 

The  courts  have  also  considered  this  question.  I 
have  avoided  a  multiplicity  of  decisions  in  my  brief; 


18 

but  I  have  cited  at  the  bottom  of  page  7  a  leading 
English  case  in  which  precisely  this  procedure  was  in- 
volved. A  railroad  company  had  for  years  been  pay- 
ing for  certain  locomotives  and  other  rolling  stock  out 
of  earnings  and  charging  those  expenditures  to  current 
expense.  Finally  its  board  of  directors  determined  to 
do  just  what  we  did  in  the  Chicago  &  Alton,  to  carry 
those  expenditures  to  capital  account,  increase  the  sur- 
plus, and  at  once  declare  a  dividend  from  that  surplus. 
A  stockholder  made  the  same  criticism  that  Mr.  Hillard 
made,  but  the  judge  of  the  high  court  of  appeals  over- 
ruled the  objection,  and  said : 

"  I  have  no  hesitation  in  saying  that  the  circumstance 
that  they  had  been  paying  what  ought  to  be  charged 
to  capital  out  of  revenue  does  not  prevent  their  right 
or  their  dut}^  to  the  persons  who  are  looking  for  their 
payment  out  of  revenue  to  credit  back  to  revenue  those 
things  which  have  been  carried  for  the  time  to  capital 
account." 

So  I  say  that  the  procedure  we  adopted  was  not  only 
sound  under  the  rules  of  accounting,  but  it  is  sound 
under  the  decisions  of  the  courts. 

We  have  now  disposed  of  the  readjustment  of  the 
accounts,  and  of  the  placing  upon  the  books  of  this  sur- 
plus increased  by  about  $12,400,000. 

I  think  the  next  criticism  of  these  transactions  is  as 
to  the  use  of  $6,669,000  of  the  proceeds  of  the  sale  of 
$32,000,000  of  bonds  for  the  purpose  of  paying  a  cash 
dividend  of  30  per  cent  to  the  stockholders,  that  divi- 
dend being  charged  against  the  surplus  which  was  cre- 
ated as  I  have  just  pointed  out. 

I  have  explained  to  you  that  the  Blackstone  manage- 
ment had  announced  its  purpose  of  declaring  a  stock 
dividend,  representing,  I  should  say  from  the  circular, 
the  entire  expenditure  for  improvements  which  had 
been  charged  to  current  expense.  We  differed  from 
their  procedure  simply  in  declaring  a  cash  dividend  of 
30  per  cent  which  represented  only  about  40  per  cent  of 
our  surplus.  There  can  be  no  doubt  about  the  legality 
of  that  procedure.  There  is  not  the  slightest  doubt, 
under  the  authorities,  that  where  a  corporation  has  a 


19 

surplus  it  may  use  the  proceeds  of  bonds  for  the  pur- 
pose of  paying  a  dividend.  On  page  8  of  my  brief  you 
Avill  find  a  verj'  brief  statement  of  that  rule  from  the 
fifth  edition  of  Cook  on  Corporations,  reading  thus : 

'•  When  the  company  has  used  profits  for  improve- 
ments, it  may  lawfully  borrow  an  equivalent  sum  of 
money  for  the  purpose  of  a  dividend.  And  it  may 
])roperly  borrow  money  to  pay  a  dividend  if,  upon  a 
fair  estimate  of  its  assets  and  liabilities,  it  has  assets  in 
excess  of  its  liabilities  and  capital  stock  equal  to  the 
amount  of  the  proposed  dividend." 

As  there  can  be  no  doubt  about  the  legality  of  that 
dividend,  I  shall  simply  discuss  its  propriety. 

You  will  remember  that  Mr.  Blackstone  had  alreadv 
^         .  .   .  *" 

committed  himself  to  the  policy  of  giving  the  stock- 
holders something  to  represent  this  investment  of  earn- 
ings in  the  property,  and  that  at  the  time  the  syndicate 
bought  the  stock  at  $175  a  share,  according  to  our  own 
books  and  according  to  Mr.  Blackstone's  own  statement, 
every  $100  share  of  stock  represented  a  little  over  $170 
in  actual  cash  invested  in  the  property.  And  that  is 
without  making  any  allowance  for  the  great  increase  in 
the  value  of  terminals  and  the  value  of  real  estate  which 
must  have  taken  place  during  the  forty  years  since  the 
company  had  begun  business.  So  I  can  not  see,  I  am 
bound  to  say,  any  reason  in  the  world  why  under  such 
circumstances  the  directors  should  not  sell  bonds  when 
they  could  sell  them,  as  they  sold  them  then,  on  a  3i  per 
cent  basis,  and  take  a  moderate  portion  of  the  proceeds 
of  those  bonds  and  distribute  it  among  the  stockholders 
by  way  of  an  extra  dividend,  thus  returning  about  40 
per  cent  of  their  profits  which  had  during  the  previous 
years  been  inve,sted  in  permanent  improvements;  that  is, 
in  building  up  the  property.  If  they  had  a  right  to 
declare  a  stock  dividend,  they  had  a  right  to  declare  a 
cash  dividend.  I  think  that  if  it  had  not  happened  that 
when  that  divi'dend  was  declared  the  stock  was  repre- 
sented by  four  men,  it  would  to  this  day  have  pro- 
voked no  comment.  If  there  had  been  no  change  in  the 
management,  for  instance,  and  the  stock  had  remained 
in  the  hands  of  the  seven  or  eight  hundred  holders  who 


20 

originally  held  it,  and  it  had  been  decided  to  distribute 
$6,500,000  in  cash  from  the  proceeds  of  bonds  sold  on  a 
3|  per  cent  basis  among  the  stockholders,  there  would 
have  been  no  criticism  or  comment.  I  think  it  was  an 
entirely  proper,  as  it  was  an  entirely  lawful,  procedure, 
particularly  under  the  standards  which  were  then  ap- 
plied to  such  transactions  as  this. 

Now  we  come  to  the  final  step,  and  that  is  the  organ- 
ization of  the  Chicago  &  Alton  Railway  Compam.  its 
issue  of  $22,000,000  of  3^  per  cent  bonds,  and  a  little  less 
than  $20,000,000  of  preferred  and  $20,000,000  of  com- 
mon stock  in  payment  for  the  97  per  cent  of  the  stock 
of  the  old  railroad  company  which  the  syndicate  owned, 
and  for  the  line  between  Springfield  and  Peoria,  for 
which  the  four  leaders  of  the  syndicate  had  paid 
$3,000,000.  There  is  not  the  slightest  doubt  that  the 
purpose  of  that  recapitalization  was  to  give  to  the 
stockholders  who  had, invested  their  $39,000,000  in  the 
railroad  company's  stock  preferred  securities  which 
would  represent  approximately  the  then  demonstrated 
value  of  that  property,  which  they  could  sell  and 
which  were  looked  upon  as  investment  securities,  and 
common  stock  which  they  could  keep  and  which  would 
represent  the  control  of  the  property  and  w^hich  would 
represent  the  future  of  the  property — the  value  which, 
in  their  judgment,  was  there  because  of  the  probable 
increase  in  business,  the  probable  increase  of  earnings 
and  the  probable  increase  of  efficiency  in  management 
due  to  their  control  and  to  the  growth  of  the  country. 

In  this  case  and  in  other  cases  I  think  there  is  no 
doubt  about  the  legality  of  the  transaction.  I  think  no 
one  can  question  that  the  railroad  company  had  the 
right  to  acquire  the  stock  of  the  railroad  company 
owning  this  short  railroad,  and  the  right  to  issue  its 
own  stock  and  bonds  in  payment  therefor  at  a  value 
fixed  by  its  directors  in  good  faith,  considering  all 
the  circumstances,  those  of  the  past  as  well  as  those 
of  the  future.  So  again  I  shall  confine  m3self  to  the 
discussion  of  the  propriety  of  the  transactions.  I  could 
cite  authorities  innumerable  in  Illinois  which  would 


21 

demonstrate  beyond  possible  question  the  legality'  of 
the  transaction. 

Commissioner  Clements.  Mr.  Cravath,  when  you 
add  the  30  per  cent  dividend  which  was  paid  in  monej' 
from  the  proceeds  of  these  bonds  and  take  into  account 
the  difference  between  G5,  at  which  they  were  taken,  and 
90-odd,  which  they  were  soon  worth,  how  much  would 
that  add  to  the  profit  in  that  deal  in  the  bonds — the  30 
per  cent  of  cash  dividend  that  was  paid  from  the  pro- 
ceeds ? 

Mr.  Cravath.  It  is  interesting  to  note  that  the  profit 
on  this  transaction  was  really  very  much  less  than 
supposed.  Of  course  the  profit  to  each  particular  in- 
dividual depended  upon  when  he  sold  his  securities. 
If  a  member  of  this  syndicate  kept  his  bonds  and  kept 
all  his  securities,  he  to-day  would  have  a  very  small 
profit,  while  he  who  sold  at  the  most  favorable  time — 
and  very  few  men  succeed  in  selling  at  the  most  favor- 
able time — would  have  made  a  substantial  profit. 

Commissioner  Clements.  The  man  who  did  sell  at 
the  best  time  and  who  sold,  I  believe  it  was  stated  here, 
to  the  New  York  Life  Insurance  Company — some  of 
it  at  90,  I  think — and  only  paid  65  for  it  and  then  got 
his  30  per  cent  dividend  in  cash,  was  able  to  get  some- 
thing like  60  per  cent  dividend  all  together,  putting  the 
two  things  together  ? 

Mr.  Cravath.  Xo,  Mr.  Commissioner.  You  remem 
ber  that  was  a  sale  of  $10,000,000  of  bonds ;  it  was  not 
to  the  New  York  Life  Insurance  Company;  it  was  to 
Goldman,  Sachs  &  Co.  The  syndicate  managers  had  no 
knoAvledge  of  and  no  dealings  with  the  New  York  Life 
as  the  purchaser  of  those  bonds.  The  sale  was  made  to 
the  banking  house  known  as  Goldman,  Sachs  &  Co., 
and  they  in  turn  sold  to  the  New  York  Life.  That  was 
only  $10,000,000  of  the  $32;000,000  held  by  this  syndi- 
cate. The  average  price  secured  for  these  bonds  was 
very  much  lower.  I  believe  that  a  man  who  sold  at  the 
most  opportune  time  and  took  advantage  of  the  highest 
prices  would  have  made  a  profit  in  the  proportion  that 
$6,000,000  bears  to  $39,000,000—1  think  about  14  per 
cent. 


22 

Commissioner  Harlax.  Was  there  not  a  market  quo- 
tation of  their  bonds  at  96? 

Mr.  Cravath.  Yes;  but  the  bonds  were  held  by  the 
syndicate.  Mr.  Commissioner,  and  were  only  marketed 
as  the  market  took  them.  As  a  matter  of  fact,  when  the 
S3'ndicate  was  dissolved,  I  think — in  naming  the  precise 
amount  I  am  speaking  of  the  time  when  the  syndicate 
was  dissolved — only  $17,000,000  of  bonds  had  been  mar- 
keted, and  the  remaining  $15,000,000  were  distributed 
pro  rata  among  the  one  hundred  membei's  of  the  syn- 
dicate. 

Commissioner  Clements.  To  the  extent  that  a  stock- 
holder in  this  syndicate  paid  only  65  and  got  96,  he  was 
ahead  something  over  30  per  cent,  was  he  not  ? 

Mr.  Cravath.  He  was  not  ahead,  Mr.  Commissioner. 
He  had  reduced  the  cost  of  his  stock. 

Commissioner  Clements,  P'ifty  per  cent.  And  when 
you  add  that  to  the  cash  dividend  of  30  per  cent 

Mr.  Cravath.  No  particular  stockholder  sold  at  that 
price.  The  sale  of  the  $10,000,000  of  bonds  was  made 
for  the  whole  syndicate.  It  was  shared  pro  rata  by  the 
one  hundred  members  of  the  syndicate.  But,  answering 
your  question,  there  is  no  doubt  that  to  the  extent  of 
the  30  per  cent  dividend  and  to  the  extent  of  the  profits 
which  the  syndicate  did  make  on  the  bonds  purchased 
at  65.  they  did  reduce  in  effect  their  cash  investment  in 
the  stock.  There  is  no  doubt  about  that;  there  is  no 
doubt  that  that  was  one  of  the  purposes. 

Commissioner  Lane.  The  sale  of  the  3  per  cent  bonds 
was  not  an  isolated  transaction. 

Commissioner  Clements.  The  point  I  was  making 
was  that  the  30  per  cent  dividend  was  not  the  limit  of 
the  profits  in  this  transaction. 

Mr.  Cravath.  Oh.  no;  by  no  means.  And  I  frankly 
say  that  the  purpose  of  the  recapitalization  was  to  re- 
duce the  cash  investment  in  these  securities;  and  in 
the  final  step — that  is,  in  the  organization  of  the  rail- 
way company  and  the  issue  of  its  securities — the  pur- 
pose was  undoubtedly  to  create  preferred  securities, 
the  3^  per  cent  Iwnds  and  the  4  per  cent  stock,  which 
were  based  upon  the  then  value  of  the  property  and 


23 

which  could  theti  be  sold,  and  to  have  common  stock 
that  would  represent  the  future  of  the  property  and  the 
added  earning  capacity  which  they  thought  would 
come  in  the  near  future.     There  is  no  doubt  about  that. 

Commissioner  Clark.  And  the  effect  of  it  was  to 
make  these  jDref erred  securities  cost  them  about  50  cents 
on  the  dollar. 

Mr.  Cravath.  That  I  have  not  figured  out;  but  I 
will  state  that  in  a  different  form  in  a  minute,  Mr. 
Commissioner.  I  will  point  out  what  relation  those 
preferred  securities  had  to  the  earning  capacity  of  the 
property. 

Commissioner  Clark.  I  only  base  that  suggestion  on 
the  fact  that  they  got  a  30  per  cent  dividend  in  cash, 
which  wonld  reduce  the  cost  to  70;  and  then,  as  you 
say,  they  netted  about  14  or  15  per  cent  out  of  the  bonds, 
which  would  bring  it  down  to  55. 

Mr.  Cravath.  The  most  fortunate  man ;  very  few 
men  did  that.  The  average  profit  was  just  about  14 
per  cent,  I  should  say.  You  see  Ave  have  a  cost  of 
$39,000,000  for  this  stock.  Roughly  speaking,  there 
was  $12,000,000  profit  from  the  dividend  and  from  the  3 
per  cent  bonds.  That  would  bring  the  $39,000,000 
down  to  $27,000,000;  so  that  the  stock  would  still  rep- 
resent a  cash  investment  of  about  $27,000,000. 

Commissioner  Clark.  Less  the  profits  on  the  bonds. 

Mr.  Cravath.  No  ;  after  deducting  it. 

Commissioner  Clark.  But  there  is  $12,000,000  abso- 
hite  profit  in  the  30  per  cent  dividend. 

Mr.  Cravath.  No;  six  millions  and  a  half  in  the 
dividend;  a  maximum  possible  profit  of  about  $6,000,- 
000  on  the  bonds.  So,  roughly,  I  say  the  $39,000,- 
000  was  reduced  by  $12,000,000  in  the  case  of  those 
stockholdei-s  who  were  most  fortunate  in  selling  their 
3  per  cent  bonds  at  the  maximum  profit. 

Mr.  MiLBURN.  That  is  arguing  on  a  hypothetical 
profit,  which  was  never  realized. 

Mr.  Cravath.  Which  was  never  fully  realized. 

Commissioner  Clements.  If  they  had  a  market  value 
and  were  salable  at  that,  the  only  reason  a  man  did  not 


24 

realize  it  was  because  he  was  waiting  for  something 
better,  was  it  not  ? 

Mr.  Cravath.  No,  Mr.  Commissioner;  they  had  a 
market  vahie;  but  there  was  a  limited  market.  The 
mere  fact  that  the  syndicate  only  disposed  of  $17,000,- 
000  would  indicate  that  the  remainder  of  their  bonds 
could  not  be  marketed  at  that  price.  You  must  re- 
member that  these  bonds  had  a  narrow  market.  They 
were  savings  banks'  bonds.  The  ordinary  man  does 
not  buy  3  per  cent  bonds,  and  these  bonds  could  be  sold 
at  that  price  only  to  the  extent  that  they  could  be  pur- 
chased by  institutions  which  wanted  high-class  bonds 
that  were  under  the  law  savings  banks'  investments. 
The  market  was  very  narrow. 

Now.  what  I  want  to  say  about  the  issue  of  these 
securities  of  the  railway  company  is  this:  The  gen- 
tlemen who  were  conducting  this  recapitalization  were 
using  the  financial  methods  which  at  that  time  were 
generally  in  use,  which  were  considered  proper,  and 
which  were  being  applied  to  many  railroads  and  to 
more  industrials.  The  basis  was,  to  issue  preferred 
securities  based  upon  the  demonstrated  earning  capacity 
of  the  property,  and  common  stock  for  the  estimated 
additional  value  of  the  property,  based  on  its  future 
prospects.  In  Mr.  McClement's  report  you  will  find 
a  great  mam'  cases  where  just  that  theory  of  recapi- 
talization was  applied  to  important  properties,  and 
there  was  no  criticism  at  the  time.  Then  you  must  re- 
member that  this  transaction  at  the  time  was  fully 
understood.  Just  what  was  being  done  was  known  to 
thousands  of  people,  and  there  was  no  advei*se  criticism. 
It  was  a  transaction  that  was  proper  at  the  time  under 
the  standards  which  then  prevailed  and  which  were 
applied  to  such  transactions. 

If  you  will  turn  to  page  12  of  my  brief,  you  will  find 
how  these  rules  were  applied.  First,  the  aggregate  cash 
value  of  the  property  as  of  June  30,  1906.  based  upon 
the  price  paid  for  the  old  stock  by  the  syndicate  and 
including  the  expenditures  for  extensions  and  better- 
ments was  approximately  $77,000,000.  In  making  this 
estimate,  Intake  $175  a  share  for  common  and  $200  a 


25 

share  for  preferred.  That,  however,  happens  to  be 
almost  precisely  the  intrinsic  cost  of  the  property  ac- 
cording to  Mr.  Blackstone's  own  report.  I  then  add  to 
that  the  market  value  of  the  high  interest-bearing 
securities  about  to  mature,  which  had  to  be  funded, 
and  $19,500,000  of  additional  capital  expenditures  made 
upon  the  property. 

So,  for  the  basis  of  our  comparison,  as  of  June  30, 
1906,  we  have  a  cash  value  of  about  $77,000,000.  That 
is  what  the  property  cost  in  cash.  Xo  one  can  doubt 
the  propriety  of  $77,000,000  of  securities  being  issued 
against  that  investment. 

Now,  what  capitalization  had  we  at  the  end  of  this 
recapitalization?  That  is  my  second  figure.  As  a  re- 
sult of  the  recapitalization  the  total  amount  of  securi- 
ties (bonds  at  approximate  market  value  and  stocks  at 
par)  outstanding  against  that  total  cash  value  on  June 
30.  1906,  was  about  $105,000,000.  Of  course,  where 
you  create  3  per  cent  bonds  and  3^  per  cent  bonds  they 
shoyld  be  taken  at  their  fair  market  value,  not  at  their 
par  value.  The  stocks,  however,  on  any  r.ecapitaliza- 
tion  should  be  taken  at  their  par  value,  I  agree.  So  our 
real  capitalization  of  June  30,  1906,  was  $105,000,000. 
In  appendix  C  to  my  brief,  page  23,  you  will  find  the 
details,  beginning  at  the  botton  of  the  page.  We  have 
$37,350,000  of  3  per  cent  bonds,  which  I  take  at  90— 
ten  points  above  their  present  market  value,  but  I  am 
assuming  that  at  the  time  they  could  have  been  sold 
at  the  average  price  of  90— and  $22,000,000  of  3|  per 
cent  bonds  at  82^,  much  above  their  present  market 
value,  but  their  market  value  at  the  time  when  the 
low  rates  of  interest  prevailed.  The  notes  are  taken 
at  their  market  value  at  the  time;  guaranteed  stocks 
at  150,  the  same  as  in  the  earlier  statement;  and  the 
common  and  preferred  stock  are  taken  at  par. 

So  we  have  a  capitalization  of  $105,000,000  as  com- 
pared with  what  I  call  a  cash  cost  of  $77,000,000 — an 
increase  in  capitalization  of  $28,000,000. 

The  aggregate  amount  of  preferred  securities  under 
the  recapitalization — that  is,  both  3  per  cent  bonds  and 
3|  per  cent  bonds  taken  at  the  assumed  fair  value, 


26 

which  I  have  stated  was  much  above  their  present 
vahie,  and  the  stocks  at  par — was  $85,000,000,  which  is 
only  $8,000,000  in  excess  of  the  cash  vahie.  Now,  re- 
member that  the  tangible  property  of  this  company 
had  increased  enormously  during  the  lapse  of  years. 
Its  terminals  had  increased  many  times  in  value.  Its 
large  holdings  of  real  estate  had  increased  many  times 
in  value.  But  the  amount  of  preferred  securities  out- 
standing exceeded  the  cost  value  by  only  $8,000,000,  or, 
if  you  deduct  the  cash  dividend  paid  of  $6,000,000,  by 
only  $14,000,000. 

The  real  test,  however,  is  the  amount  of  earnings  dis- 
tributed. The  average  annual  amount  which  the  Chi- 
cago &  Alton  Railroad  Company  had  been  paying  out 
in  interest  and  dividends  for  many  year§  prior  to  the 
recapitalization  was  $2,906,000.  That  is  the  average 
amount  actually  paid,  ignoring  the  profits  carried  to 
surplus  or  expended  on  permanent  improvements. 
The  annual  fixed  charge  on  June  30,  1906.  including 
interest  on  all  obligations  and  the  4  per  cent  dividends 
upon  the  preferred  stock,  was  $3,228,000,  an  increase 
of  only  $321,000.  But  it  must  be  remembered  that  in 
the  meantime  we  had  spent  over  $19,000,000  in  improv- 
ing the  property,  and  that  this  increase  in  fixed  charges 
was  only  1.43  per  cent  per  annum  upon  this  new  capi-. 
tal  and  the  $3,000,000  paid  for  the  Springfield-Peoria 
line.  In  other  words,  our  preferred  securities  under 
the  present  plan,  including  the  preferred  stock,  very 
little  exceed  the  actual  cost  of  the  property,  are  less 
than  its  fair  intrinsic  value,  making  a  proper  allow- 
ance for  the  apppreciation  of  values,  and  were  based 
upon  the  average  annual  disbursements  for  dividends 
for  upward  of  twenty  years. 

Commissioner  Clements.  That  makes  no  allowance 
for  future  dividends  on  the  stock? 
-    Mr.  Cravath.  No. 

We  now  come  to  the  common  stock.  And  in  this 
connection  let  me  remind  you  again  that  Mr.  Black- 
stone  had  pointed  out  that,  without  any  allowance 
for  appreciation  in  values,  the  old  securities  outstand- 
ing represented  only  about  60  per  cent  of  the  aggre- 


27 

gate  casli  cost  of  the  property.  Therefore  I  take  it 
that  if  we  had  confined  our  issue  of  securities  to  the 
amount  of  the  preferred  securities — to  the  $85,000,000 
of  preferred  securities— no  one  could  say  that  we  had 
made  an  excessive  issue;  because,  based  upon  the  earn- 
ing record  of  the  company  for  over  twenty  years, 
there  would  have  been  ample  profits  to  pay  every  dol- 
lar of  interest  and  every  dollar  of  dividends.  Or, 
putting  it  differently,  there  could  be  no  serious  criti- 
cism, under  the  standards  which  were  being  applied  at 
the  time.  (You  should  remember  I  am  discussing  this 
transaction  as  of  eight  years  ago.)  If  in  place  of  the 
$20,000,000  of  stock,  which  for  many  years  had  car- 
ried 8  per  cent  dividends,  we  had  created  $40,000,000 
of  stock  carrying  4  per  cent  dividends,  the  result  woidd 
have  been  the  same.  That  is  precisely  the  principle 
which  was  applied  when  the  Great  Northern  and 
Northern  Pacific  acquired  the  Chicago,  Burlington  & 
Quincy  stock,  and  for  every  $100  of  the  stock  thus 
acquired  issued  $200  in  new  4  per  cent  securities.  The 
dividend  charge  was  not  being  increased.  The  same 
rule  was  applied  when  the  New  York  Central  issued 
for  every  $100  of  Lake  Shore  stock,  which  was  paying 
7  per  cent  dividends,  $200  of  New  York  Central  bonds 
carrj'ing  3^  per  cent  interest.  While  the  par  value  in 
each  case  of  the  securities  outstanding  was  double,  the 
fixed  charge,  the  disbursements  to  the  stockholders  and 
the  charge  on  the  property  were  not  being  increased. 
And  I  do  not  think  anybody,  even  at  this  time,  would 
have  criticised  this  plan,  if  the  issue  of  securities  had 
been  limited  to  $85,000,000.  So  I  take  it  that  the  real 
criticism  is  directed  against  the  $20,000,000  of  common 
stock  which  was  issued  to  represent  the  future  growth 
of  the  property. 

Now,  remember,  up  to  our  $20,000,000  of  common 
stock  the  past  disbursements  for  dividends,  based  on 
the  average  for  twenty  years,  was  sufficient  to  pay  the 
interest  and  dividends  upon  all  of  our  securities. 

I  respectfully  submit,  again  considering  the  stand- 
ards which  were  being  applied  at  that  time,  that  the 
framers  of  this  plan  were  entirely  justified  in  their 


28 

judgment  that  the  future  of  that  property  could  be 
fairly  valued  at  $20,000,000  or  even  $30,000,000.  As 
a  matter  of  fact,  the  increase  was  about  $28,000,000 
over  the  actual  cash  cost  of  the  property.  In  the  first 
place,  they  had  a  right  to  consider  the  real  increase  in 
value  which  had  taken  place  in  the  tangible  property 
of  the  company.  In  the  second  place,  the}^  had  a  right 
to  consider  the  probable  growth  of  the  country,  the 
probable  growth  of  the  business,  and  their  capacity,  by 
applying  modern  methods  of  management  and  making 
liberal  expenditures  for  the  improvement  of  the  prop- 
erty, to  increase  its  net  earnings. 

In  that  connection  I  will  call  your  attention  to  a 
report  by  a  coordinate  branch  of  the  Government,  the 
Department  of  Commerce  and  Labor,  on  the  commer- 
cial A'aluation  of  railway  operating  property  in  the 
United  States  for  1904,  in  which  they  speak  of  the  Chi- 
cago &  Alton  recapitalization.  That  report  is  made  by 
Mr.  Eaton,  a  well-known  expert,  and  is  adopted  as  a 
part,  of  the  report  of  the  Department  of  Commerce 
and  Labor.  It  is  there  stated  that  the  average  net 
income  of  the  Chicago  &  Alton  for  the  years  1901, 
1902,  and  1903  was  $3,356,790.     The  report  continues : 

"  On  a  4  per  cent  basis  this  would  sustain  a  capitali- 
zation of  $83,917,250,  or,  on  a  5  per  cent  basis,  $67,135,- 
800.  The  price  paid  was  $39,773,425.  It  is  safe  to 
say  that  after  making  due  allowance  for  rental  of 
added  mileage,  the  property  is  now  worth  $20,000,000 
to  $25,000,000  more  than  at  the  time  purchased." 

This  was  the  estimate  made  by  an  impartial  observer 
six  years  after  the  purchase  was  made.     He  adds : 

"  It  is  entirely  speculative  to  say  what  part  of  this 
is  the  normal  growth  during  prosperous  years  and  what 
part  is  the  value  the  new  owners  brought  by  the  greater 
energy  and  enterprise  displayed  and  the  relation  with 
connections  which  they  controlled.  In  view  of  the 
complete  revision  of  operating  methods  which  they 
brought  about,  our  judgment  leads  us  to  credit  the 
greater  part  of  this  increase  to  the  new  conditions 
which  they  created,  joined,  as  they  were,  with  the 
immense  growth  and  prosperity  of  business." 


29 

Here  is  the  impartial  estimate  of  a  Government  ex- 
pert that  the  value  of  the  property  increased  by  from 
$20,000,000  to  $25,000,000. 

Let  us  analyze  the  earnings.  The  average  annual  net 
income  of  the  company  for  eight  years  from  1891  to 
1898,  inclusive,  which  included  four  years  of  business 
depression,  was  $3,082,000.  That  was  the  earning  rec- 
ord which  the  framers  of  this  plan  had  before  them. 
To  this  amount  should  be  added  5  per  cent  upon  the 
additional  cash  invested,  which  turned  out  to  be  about 
$22,500,000,  which  certainly  they  could  assume  would 
be  the  fair  estimated  additional  income  that  would 
result  from  that  additional  investment.  That  gives 
$1,125,000.  We  therefore  have  as  an  earning  capacity, 
which  maybe  fairly  assumed  from  past  achievements, 
of  $4,207,000.  That  amount  would  have  been  sufficient 
to  enable  the  new  Chicago  &  Alton  Company  under  its 
recapitalization  to  pay  all  existing  fixed  charges  and 
dividends  at  the  rate  of  4  per  cent  per  annum  on  both 
preferred  and  common  stock. 

Let  me  make  that  plain.  The  average  earnings  of  the 
previous  eight  years,  increased  by  5  per  cent  upon  the 
expenditures  for^  improvements,  would  have  furnished 
an  earning  fund  sufficient  to  pay  all  fixed  charges  under 
the  recapitalization  and  4  per  cent  on  both  preferred 
and  common  stocks. 

In  the  case  of  most  railroads  in  the  West  the  net 
earnings  since  1898  have  increased  in  much  greater  pro- 
portion than  have  the  gross  earnings.  If  the  Chicago  & 
Alton  Company  had  increased  its  n6t  earnings  in  only 
the  same  proportion  as  the  gross  earnings  increased,  it 
would  have  resulted  in  the  net  earnings  for  the  fiscal 
year  190G  amounting  to  $4,900,000,  which  amount  would 
have  been  sufficient  to  pay  all  fixed  charges,  rentals,  4 
per  cent  dividends  on  the  preferred  stock,  and  leave  a 
surplus  of  $1,671,000,  or  over  8  per  cent  on  the  common 
stock. 

I  should  point  out  that  in  1905  for  one  year  the  actual 
earnings  were  sufficient  to  pay  all  fixed  charges.  4  per 
cent  on  the  preferred,  and  a  shade  over  4  per  cent  on  the 
common. 


30 

The  failure  of  the  Chicago  &  Alton  Company  to  meei 
the  expectations  of  the  framers  of  the  plan  and  provide 
the  expected  dividends  on  the  common  stock  is  due 
chiefly  to  two  causes.  In  the  first  place,  instead  of  the 
property  requiring  $6,000,000  of  new  money  for  im- 
provements, as  had  been  estimated  originally,  it  has 
absorbed  $19,500,000  of  capital  for  improvements. 
That  is  due  to  the  great  increase  in  costs,  to  a  great 
development  in  the  gross  tonnage  of  the  railroad,  and, 
I  have  no  doubt,  also  to  some  inaccuracy  in  the  estimates 
at  the  time  made. 

The  other  cause,  and  a  still  more  important  cause, 
is  the  reduction  in  freight  rates  on  the  Chicago  &  Alton 
and  in  the  territory  through  which  the   Chicago  & 
Alton  passes,  a  reduction  which  Mr.  Harriman  testi- 
fied w^as  about  30*per  cent.     You  will  find  annexed  to 
Mr.   McClement's  report   a   very   interesting  diagram 
showing  the  comparative  growth  of  the  gross  income, 
net  income,  and  of  fixed  charges.     You  will  see  that  the 
fixed  charges,  including  4  per  cent  on  the  preferred 
stock — that  is,  the  total  disbursements  to  stockholders 
and  bondholders — remained  about  stationary   for  the 
past  twelve  years;  and  that  during  the  past  six  years 
the  groBs  earnings  have  increased  with  startling  rapid- 
ity, but  the  net  earnings  have  remained  almost  station- 
ary.    They  have  increased  in  a  slightly  greater  propor- 
tion than  the  disbursements  for  dividends  and  interest. 
Here  again  is  the  reason  why  the  Chicago  &  Alton 
Company  to-day  has  difficulty  in  raising  large  sums  of 
money   for  capital  expenditures.     There  is  no  doubt 
that  it  has  turned  out  that  the  recapitalization  of  the 
Chicago  &  Alton  Company  did  not  make  sufficient  pro- 
vision for  new^  capital.     But  the  reason  is  that  while 
the  framers  of  this  plan  thought  that  $6,000,000  was 
enough,  they  have  been  compelled  to  raise  $19,500,000. 
They  thought  they  were  making  a  very  liberal  provision 
for  the  future  improvement  of  the  property  in  provid- 
ing a  leeway  of,  I  think,  about  $12,000,000,  which  could 
have  been  raised  with  the  reserved  bonds. 

If  tlie  freight  rates  of  the  Chicago  &  Alton  Company 
had  remained  stationary,  it  would  have  earned  12  per 
cent  on  its  common  stock.     I  am  saying  all  this  simply 


31 

to  point  out  to  you  that  the  framers  of  this  plan  were 
justified  by  the  facts  before  them,  and  they  have  been 
justified  by  subsequent  events  in  the  sanity  of  their 
estimate  that  the  company  could,  with  good  manage- 
ment and  good  business,  earn  fair  returns  on  this 
$20,000,000  of  common  stock. 

Finally — and  I  am  just  about  to  close,  gentlemen — 
I  want  to  point  out  that  the  capitalization  of  the  Chi- 
cago &  Alton  Railway  Company  is  not  excessive  as  com- 
pared with  that  of  other  railroad  companies  similarly 
situated.  This  is  demonstrated  by  some  comparisons 
which  you  will  find  on  page  16  of  my  brief,  and  the 
basis  for  which  you  will  find  in  Mr.  McClement's  report. 

The  present  capitalization  of  the  Chicago  &  Alton, 
including  stocks  and  bonds,  all  taken  at  their  par  value 
(which  is  unfair  to  the  Alton  in  comparison  with  other 
companies,  because  its  bonds  bear  3  and  3^  per  cent 
interest,  while  most  bonds  bear  from  4  to  5  per  cent 
interest),  is  $114,000  per  mile.  Take  seventeen  other 
railroads,  which  have  been  selected  by  Mr.  McClements, 
the  average  per  mile  is  over  $150,000.  If  we  take  the 
fixed  charges  per  mile,  including  dividends  on  preferred 
stock,  in  the  case  of  the  Chicago  &  Alton,  we  have  $3,328 
per  mile.  In  the  case  of  twenty-four  other  railroads  the 
fixed  charges  only — by  fixed  charges  I  mean  interest  on 
bonds — are  $4,997  per  mile.  The  percentage  of  gross 
earnings — and  this,  after  all,  is  the  fairest  test — the 
percentage  of  gross  earnings  required  to  pay  fixed 
charges,  as  shown  by  the  Interstate  Commerce  Com- 
mission report  of  1905,  in  the  case  of  the  Chicago  & 
Alton,  is  19.57  per  cent;  of  all  other  railroads  of  the 
United  States,  18.63.  The  disbursements  per  mile  re- 
quired to  pay  fixed  charges  and  dividends  (4  per  cent 
on  Chicago  &  Alton  common  and  preferred)  would  be 
$4,515  per  mile;  in  the  case  of  thirty-five  other  rail- 
roads the  amount  is  $5,729  per  mile. 

I  submit  the  following  final  conclusions: 

First,  these  transactions  were  lawfully  conducted. 
Second,  they  were  conducted  openly  and  all  the  essen- 
tial facts  were  given  wide  publicity  and  have  at  all 
times  been  accessible  to  stockholders  and  to  investors  in 
356&-07  M 3 


32 

Chicago  &  Alton  securities.  Third,  they  were  in  ac- 
cordance with  the  approved  methods  which  at  that  time 
were  in  vogue  in  recapitalizing  other  railroad  com- 
panies and  large  industrial  enterprises.  Fourth,  they 
were  conducted  for  the  equal  benefit  of  all  stockholders 
and  there  was  no  discrimination  or  injustice  as  between 
stockholders. 

Finally,  while  the  Chicago  &  Alton  transactions  may 
be  regarded  as  typical  of  a  class  of  financial  transac- 
tions which  have  Jt>een  common  in  the  past,  and  which 
have  generally  been  regarded  as  proper,  and  whatever 
basis  there  may  be  now  for  objections  to  such  trans- 
actions as  a  class,  taking  this  as  an  illustration  of 
a  type  of  a  large  class  of  transactipns,  I  submit  there 
is  no  basis  for  singling  out  for  special  criticism  the 
Chicago  &  Alton  transactions  and  the  gentlemen  by 
whom  they  were  conducted. 

Commissioner  Harlan.  Mr.  Cravath,  in  what  sense 
do  you  use  the  word  "  stockholders  "  in  your  fourth  con- 
clusion? Do  you  refer  to  the  one  hundred  gentlemen 
who  formed  that  sjmdicate  ? 

Mr.  Cravath.  I  refer  to  the  one  hundred  gentlemen 
who  formed  that  syndicate  and  the  3  per  cent  who  did 
not  sell  to  the  syndicate. 

Commissioner  Harlax.  Does  the  record  disclose  who 
those  one  hundred  members  of  the  syndicate  were  ? 

Mr.  Cravath.  Xo,  sir;  but  the  record  discloses  that 
the  syndicate  consisted  of  about  one  hundred  firms,  in- 
dividuals and  corporations. 

Commissioner  Hari^ax.  Does  the  record  disclose  how 
many  stockholders  there  were  prior  to  this  reorganiza- 
tion of  the  Chicago  &  Alton  ? 

Mr.  Cravath.  Xo,  Mr.  Commissioner ;  but  I  have  no 
doubt  that  there  were  several  hundred. 

Commissioner  Harlan.  Seven  or  eight  hundred,  I 
thought  you  said  a  little  while  ago. 

Air.  Cravath.  There  were  several  hundred,  I  should 
say. 

Commissioner  Harlan.  Then  the  stockholders  you  re- 
fer to  in  your  fourth  conclusion  are  all  the  remaining 


33 

stockholders  of  the  Chicago  &  Alton  and  the  gentlemen 
who  undertook  to  reorganize  it  ? 

Mr.  Cravath.  Yes,  sir. 

Commissioner  Harlan.  Of  course,  being  in  this  proc- 
ess of  reorganization,  they  would  all  get  an  equal  bene- 
fit from  it.  So  is  it  not  a  case  where  some  one  saw  an 
opportunity  to  reorganize — some  one  that  perhaps  was 
not  a  stockholder  at  the  time — and  became  a  stockholder 
for  that  purjDose  ? 

Mr.  Cravath.  Undoubtedly,  sir.  The  circular  rec- 
ommending the  sales  frankly  stated  that  the  men  who 
were  buying  the  stock  thought  they  had  the  ability  and 
capacity  to  increase  the  value  of  that  stock.  They  were 
therefore  willing  to  pay  what  was  thought  to.be  a  high 
price,  for  the  stock,  and  they  bought  for  the  express 
purpose  of 

Commissioner  Harlan.  They  simply  bought  an  op- 
portunity ;  was  not  that  it  ? 

Mr.  Cravath.  Undoubtedly. 

Commissioner  Harlan.  And  to  get  that  opportunity, 
they  went  into  the  market — and  offered  more  than  the 
stock  had  been  quoted  for  during  a  year  prior  to  the 
date  of  their  offer.     Is  not  that  so  ? 

Mr.  Cravath.  Yes;  but  less  than  what  Mr.  Black- 
stone  thought  to  be  the  real  value  of  the  stock. 

Commissioner  Harlan.  But,  taking  the  market  value 
as  a  general  test  of  the  value  of  stock,  they  really  bought 
an  opportunity  to  reorganize  and  recapitalize  this  com- 
pany ? 

Mr.  Cravath.  Yes;  although  the  primary  purpose 
was  not  to  recapitalize,  but  was  to  apply  modern  meth- 
ods of  management,  and  thereby  increase  the  value  of 
the  property.  That  was  the  basis  of  the  operation,  to 
increase  the  value  of  the  property,  and  in  connection 
with  that  they  clearly  had  the  plan  to  recapitalize. 

Commissioner  Harlan.  That  might  be  so,  if  all  the 
members  of  that  syndicate  retained  the  securities  and 
retained  the  stock.  But  is  this  a  fair  statement  of  the 
facts:  That  here  was  an  Illinois  corporation  organiza- 


34 

tion  that  was  being  run  fairly  well,  with  stockholders 
that  were  satisfied,  and  some  one  saw  an  opportunity  to 
recapitalize  it,  and  to  take  advantage  of  that  opportunity 
went  into  the  market  and  gave  for  the  common  and  pre- 
ferred stock  much  more  than  it  had  been  quoted  at  on 
the  market? 

Mr.  Cravath.  Not  much  more;  an  advance  of  but 
a  few  points,  as  I  remember  it. 

Commissioner  Harlan.  The  preferred  was  200.  Had 
the  preferred  been  quoted  at  200  ? 

Mr.  Cravath.  My  recollection  is  that  the  common 
had  been  selling  at  about  166  or  167. 

Commissioner  Harlan.  At  any  rate,  they  gave  a  sub- 
stantial advance  over  the  market  quotations? 

Mr.  Cravath.  Yes. 

Commissioner  Harlan.  Then  they  recapitalize  and 
presently  have  an  opportunity  to  sell  $40,000,000  of 
bonds  at  90,  which  they  acquired  at  65.  They  also  got 
a  30  per  cent  stock  dividend.  Now,  if  they  then  dis- 
pose of  those  securities  and  get  out  of  the  Chicago  & 
Alton,  is  it  not  simply  buying  an  opportunity  to  make 
money  in  a  few  months  and  letting  the  public  subse- 
quently get  out  of  it  as  best  they  can  ? 

Mr.  Cravath.  Well,  I  should  differ  with  that  state- 
ment. I  should  say  they  were  not  buying  an  oppor- 
tunity to  make  a  financial  transaction  merely.  They 
were  buying  a  property  at  a  price  at  which  the  different 
owners  were  willing  to  sell  it  and  in  that  way  buying 
an  opportunity  of  greatly  increasing  the  value  of  that 
property  and  by  that  means  making  a  profit  on  the  pur- 
chase. Now,  that,  Mr.  Commissioner,  was  the  very 
principle  that  was  being  applied  at  that  period  in  hun- 
dreds of  situations.  That  was  being  commonly  done. 
Properties  were  being  bought  at  certain  prices  by  men 
who  had  faith  in  the  future,  and  in  their  own  ability. 
They  were  being  recapitalized  by  the  application  of 
precisely  the  same  principles  that  were  applied  here. 
The  preferred  securities  were  sold  on  the  market;  the 
common  stock  was  usually  kept  by  the  men  who  ex- 
pected to  work  and  create  values.  And  I  am  bound  to 
say  that  while  the  liberty  which  our  laws  allowed  was 


35 

then  abused,  I  think  that  in  the  main  the  country  was 
an  immense  gainer  from  that  liberality  and  that  a  very 
large  part  of  our  industrial  advance  in  the  past  ten 
years  is  due  to  the  creation  of  just  such  situations  as 
this,  providing  an  incentive  to  able  and  courageous 
men,  having  faith  in  the  future,  to  develop  the  prop- 
erties which  they  purchased  and  which  they  then  sought 
to  make  more  valuable. 

Commissioner  Lane.  Mr.  Cravath,  would  you  mind 
following  up  your  idea  a  little  further?  You  have 
said,  and  the  main  portion  of  your  argument  is  devoted 
to  the  proposition,  that  this  thing  has  been  done,  but 
that  the  time  has  come  for  a  change  in  method  and  that 
you  recognize  that  there  may  properly  be  Federal  regu- 
lation of  capitalization.  You  represent  Kuhn,  Loeb  & 
Co.,  the  banking  interests  of  New  York,  and  the  rail- 
road interests.  Would  you  mind  stating  in  what  form 
that  regulation  of  capitalization  should  be  ? 

Mr.  MiLBURN.  That  is  up  to  you. 

Mr.  Cravath.  That  is  a  hard  question,  Mr.  Commis- 
sioner. We  have  been  very  carefully  considering  in 
our  State  for  some  weeks  past  Governor  Hughes's  pub- 
lic utilities  bill.  The  local  traction  interests  which  I 
represent  believe  in  the  principle  of  that  bill,  and  I  have 
been  permitted  publicly  to  express  my  views  regarding 
it.  One  of  the  chief  features  of  that  bill  is  a  very 
strong  provision  for  the  control  of  new  issues  of  stocks 
and  bonds  of  all  public  utility  corporations,  railroads, 
electric  light  companies,  gas  companies,  and  the  like. 

The  provision  which  I  have  joined  in  recommending, 
as  a  modification  of  the  provision  originally  drafted  by 
the  framers  of  the  bill,  is  one  which  requires  the  consent 
of  a  public  commission  for  every  new  issue  of  stocks  or 
bonds  by  public-service  corporations.  I  was  very  much 
opposed  to  certain  provisions  of  the  bill  which  forbade 
unconditionally  the  issue  of  stocks  and  bonds  against 
franchises — for  instance,  which  forbade  an  increase  of 
capital  on  the  consolidation  of  two  or  more  corpora- 
tions, and  which  forbade  the  issue  of  stock  under  cer- 
tain specified  conditions,  because  I  knew  perfectly  well 
that  there  were  scores  of  companies  which  would  be 


36 

prevented  from  conducting  lawful  financial  operations 
by  reason  of  those  restrictions. 

Commissioner  Lane.  Do  you  mean  to  say  you  can 
put  into  the  hands  of  this  Commission,  or  any  other 
body,  the  power  to  say  that  a  certain  issue  of  stock 
shall  issue  or  not  ? 

Mr.  Cravath.  I  think  the  only  way  of  working  out 
a  scheme  of  regulation  is  to  give  a  proper  body  of  pub- 
lic officials  the  right  to  exercise  discretion  and  judg- 
ment with  respect  to  new  issues.  It  is  impossible  to 
formulate  hard  and  fast  rules  which  will  fit  the  great 
variety  of  situations  which  must  arise  from  time  to 
time. 

Commissioner  Lane.  Was  it  not  decided  in  Minne- 
sota the  other  day  that  a  provision  of  that  kind  was 
unconstitutional  as  to  the  warehouse  commission? 

Mr.  Cravath.  I  have  not  been  able  to  get  that  de- 
cision yet.     Our  decisions  in  New  York  do  not  adopt 
the  rule,  as  I  understand  it,  as  stated  in  that  decision. 
Have  you  a  copy  of  that  opinion,  Mr.  Kellogg? 
Mr.  Kellogg.  I  have  one  in  town,  at  the  hotel ;  yes. 
Mr.  Cravath.  But  our  courts  in  New  York,  I  think, 
have  sustained,  and  would  sustain,  such  a  power  in  a 
public  commission.     I  should  very  much  regret  it,  if 
the  law  of  the  Minnesota  decision,  as  it  has  been  re- 
ported to  me,  should  be  accepted  as  general  law.     I 
think  it  would  be  exceedingly  difficult  for  a  legislature 
or  for  Congress  to  frame  arbitrary  standards  to  deter- 
mine under  what  conditions  stocks  and  bonds  may  be 
created  and  sold. 

Commissioner  Lane.  Would  it  be  better,  in  your 
judgment,  to  have  the  stock  vised  by  the  Commission 
or  by  some  authority  in  the  first  place,  or  to  have  power 
generally  vested  in  the  corporation  to  issue  stock  as  it 
sees  fit  and  have  some  power  or  authority  to  see  that 
the  money  raised  on  the  issue  of  such  stock  was  ex- 
pended as  it  was  intended  by  the  corporation  it  should 
be  expended  ? 

Mr.  Cravath.  I  do  not  think  that  alone  would  ac- 
complish youi-  purpose,  Mr.  Commissioner.  As  a  mat- 
ter of  fact,  the  history  of  corporations  in  recent  years 


37 

furnishes  very  few  cases  of  the  misuse  of  the  money 
when  it  once  reaches  the  treasury  of  the  company,  and 
I  think  the  purppse  you  have  in  view  would  not  be  ac- 
complished unless  there  were  some  machinery  whereby 
the  public  authorities  could  pass  upon  the  amount  of 
the  securities  to  be  created  for  a  given  purpose  as  well 
as  the  application  of  the  proceeds  from  the  sale  of  those 
securities. 

Commissioner  Lane.  You  think  such  a  regulation  as 
that  would  be  beneficial  to  the  railroad  carriers  of  the 
United  States,  do  you  ? 

Mr.  Cravath.  I  have  come  to  the  view — again,  I 
should  remark  that  it  is  no  business  of  a  lawyer  making 
an  argument  to  express  his  private  views  regarding 
questions  of  political  ecohomy — but  I  personally  have 
come  to  the  view  that  the  gain  from  reasonable  regula- 
tion of  that  character  would  be  greater  than  the  loss. 
There  would  be  some  loss,  of  course.  It  would  be  much 
more  difficult  to  finance  new  enterprises  requiring  cour- 
age than  under  old  conditions;  but  on  the  whole  I 
think  the  gain  would  be  quite  out  of  proportion  to  the 
loss. 

Commissioner  Harlan.  Mr.  Cravath,  if  you  will  re- 
turn for  a  moment  to  the  question  I  was  putting,  does 
this  record  disclose  whether  any  members  of  the  syndi- 
cate remained  stockholders  of  the  company  after  the 
reorganization  of  the  company? 

Mr.  Cravath.  I  think  it  does  not;  no,  sir. 

Commissioner  Harlan.  Then,  for  all  the  record 
shows,  the  syndicate  took  the  road  from  the  public  at 
one  capitalization,  and  subsequently,  after  a  few 
months,  left  it  in  the  hands  of  the  public  at  a  very 
largely  increased  capitalization,  keeping  for  itself  what- 
ever profit  there  was  in  the  transaction  ? 

Mr.  Cravath.  No,  Mr.  Commissioner;  the  record 
shows  that  when  the  syndicate  expired  the  securities 
were  distributed;  that  no  securities  were  marketed  ex- 
cept the  portion  of  the  3  per  cent  bonds ;  and  that  when 
the  distribution  took  place  among  the  hundred  members 
of  the  syndicate,  all  of  the  3^  per  cent  bonds,  all  of  the 
ncAV  common  and  preferred  stock,  and  a  portion — the 


38 

record  does  not  show  how  much— of  the  3  per  cent  bonds 
were  then  distributed  pro  rata  among  the  members  of 
the  syndicate. 

Mr.  Kellogg.  I  do  not  recollect  any  such  testimony, 
Mr.  Cravath. 

Mr.  Cravath.  Mr.  Kahn  testified  to  that,  as  I  remem- 
ber it. 

Commissioner  Harlan.  The  record  does  not  disclose 
what  became  of  the  new  stock,  so  far  as  the  syndicate 
members  were  concerned  ? 

Mr.  Cravath.  No  ;  the  record  does  not  disclose  what 
the  members  of  the  syndicate  did  with  the  new  stock, 
but  it  does  disclose  what  became  of  the  securities  on  the 
expiration  of  the  syndicate. 

Mr.  Kellogg.  Whatever  there  was  left.  Nobody  said 
how  much  there  was  left. 

Mr.  Cravath.  I  will  be  very  glad  to  say,  for  your  in- 
formation, what  was  the  fact.  We  are  not  dealing 
now  with  a  question  on  which  there  could  be  formal 
proof. 

Commissioner  Harlan.  So  far  as  the  record  discloses, 
then,  is  it  not  true  that  the  syndicate  took  this  raikoad 
from  the  hands  of  the  public  at  a  certain  capitalization 
and  after  a  few  months  left  it  in  the  hands  of  the  public 
at  a  largely  increased  capitalization,  keeping  itself 
whatever  profit  there  was  in  the  transaction ;  and  is  not 
that  the  possibility  of  such  a  system? 

Mr.  Cravath.  Of  course,  there  is  the  inherent  possi- 
bility in  every  such  transaction  of  one  set  of  owners 
selling  their  securities,  undoubtedly;  but  I  think  this 
record  does  not  justify  the  inference  that  this  syndicate 
did  sell  their  securities  to  the  public.  I  know  the  fact 
to  be  that  everything  was  distributed  by  the  syndicate 
except  about  $17,000,000  of  the  3  per  cent  bonds,  which 
the  managers  had  sold.  Then,  of  course,  each  member 
of  the  syndicate  became  free  to  do  as  he  chose  with  his 
share  of  the  securities,  and  what  the  hundred  members 
of  the  syndicate  did  from  that  time  on,  no  one  knows ; 
that  is,  no  one  man  knows.  Each  man  knows  what  he 
did  himself.    As  Judge  Lovett  points  out,  the  men  Avho 


39 

were  elected  to  the  board  of  directors  at  the  time  of  the 
formation  of  the  syndicate  still  remain  on  the  board 
and  still  control  the  company,  subject  to  the  changes 
which  took  place  when  the  Rock  Island  bought  a  certain 
proportion  of  the  stock  on  the  market. 

Commissioner  Clements.  Does  not  this  case  illustrate 
that  so  long  as  past  methods  are  to  be  allowed,  every 
well-managed  road  that  is  out  of  debt  and  not  over- 
capitalized, possibly  paying  a  good  dividend  and  pay- 
ing its  debts,  is  a  shining  mark  for  transactions  of  this 
sort,  by  which  the  capitalization  is  to  be  run  up  by 
leaps  and  bounds,  and  the  people  of  the  future  are  to 
make  good  the  fixed  charges  on  a  much  greater  capitali- 
zation than  the  property  ought  to  carry  ? 

Mr.  Cravath.  There  is  no  doubt  that  this  case  illus- 
trates that  the  liberty  of  action  in  the  issue  of  new 
securities  permitted  by  our  laws,  as  they  have  heretofore 
existed,  does  make  possible  the  creation  of  securities 
to  a  par  value  exceeding  the  demonstrated  value  of  the 
property.  Answering  your  question  affirmatively,  it 
does  offer  the  opportunity  to  men  of  ability  and  courage 
to  buy  a  property  for  a  value  which  the  public  has 
placed  upon  it,  based  on  its  past  achievements,  and 
recapitalize  it  in  the  method  which  was  applied  here. 
I  agree  with  you  that  under  existing  condition,  with  the 
country  so  fully  developed  as  ours  has  been  developed 
in  the  past  fifteen  years,  with  more  business  than  we 
can  do,  the  balance  of  advantage  is  distinctly  in  favor 
of  very  substantial  restrictions  on  the  issue  of  new 
securities. 

Commissioner  Clements.  You  think  the  rates  ought 
to  have 

Mr.  Cravath.  That  is  my  own  individual  judgment. 
I  am  not  speaking  for  my  clients. 

Commissioner  Clements.  You  think  the  rates  people 
are  compelled  to  pay  for  transportation  ought  to  have 
some  relation  to  the  actual  investment  in  the  property, 
do  you  not? 

Mr.  Cravath.  Yes;  and  they  do.  I  think  in  deter- 
mining the  reasonableness  of  a  rate  you  must  have 


40 

regard  to  the  investment  in  the  property;  but  I  say 
this  about  the  Chicago  &  Alton,  Mr.  Commissioner, 
that  considering  what  this  property  cost,  considering 
the  risk  which  these  men  ran,  considering  that  this  prop- 
erty was  started  over  forty  years  ago,  the  increase  in 
the  par  value  of  the  outstanding  securities  as  compared 
with  the  actual  cost  is  insignificant  compared  with 
the  average  increase  in  values  throughout  the  entire 
country.  The  men  who  put  their  money  into  Chicago  & 
Alton,  if  they  had  stood  pat  all  through,  and  the  ex- 
isting stocks  and  bonds  were  worth  par,  and  they  had 
had  dividends  all  the  time,  would  not  have  fared  nearly 
as  well  as  the  average  man  who  invested  in  property 
of  any  kind  thirty  years  ago. 

Commissioner  Clements.  Do  not  practices  of  this 
sort  also — the  fact  that  they  are  not  prohibited — afford 
facility  for  the  combination  of  railroads,  greater  ag- 
gregations into  greater  systems? 

Mr.  Cravath.  There  is  no  doubt  it  has  been  the  policy 
of  our  law,  Mr.  Commissioner. 

Commissioner  Clements.  The  suppression  of  com- 
petition and  all  that  follows  from  combination? 

Mr.  Cravath.  I  do  not  think  it  has  had  so  much  the 
effect  of  suppressing  competition  as  it  has  had  the 
effect  of  building  up  big  systems,  and  it  has  been  the 
policy  of  our  State  legislation 

Commissioner  Cleaients.  I  mean  big  systems  com- 
posed of  formerly  competing  lines.  I  do  not  mean 
simply  the  bringing  of  continuous  lines  into  one  sys- 
tem, but  the  bringing  together  of  formerly  competing 
roads  into  a  noncompeting  system,  under  a  general 
management. 

Mr.  Cravath.  Not  speaking  as  a  lawyer,  but  merely 
as  an  observer,  my  impression  is  that  there  has  not 
been  a  serious  combination  of  competing  lines  by  ex- 
ercising the  privileges  which  these  laws  confer.  Of 
course  the  laws  encourage  the  creation  of  these  great 
systems.  The  laws  of  almost  every  State  in  the  West, 
and  in  the  East,  for  that  matter,  encourage  the 
acquisition  by  railroad  corporations  of  the  stock  of 


41 

connecting  lines,  and  in  every  conceivable  way  have 
encouraged  the  building  up  of  these  great  systems 
which  have  been  so  useful  in  developing  the  country. 
There  is  no  doubt  about  that. 

Commissioner  Clements,  While  they  have  encour- 
aged the  acquisition  of  connecting  lines  into  continuous 
lines,  most  of  them  have  statutes  in  condemnation  of 
the  acquisition  of  parallel  and  competing  lines. 

Mr.  Cravath.  Yes;  it  has  been  the  policy  of  the 
State  legislation  to  forbid  the  combination  in  any  form 
of  competing  and  parallel  lines.  It  has  been  its  pol- 
icy to  encourage  the  formation  of  great  systems  until 
within  a  very  short  time. 

I  thank  you  very  much  for  your  patience,  gentlemen. 

ARGUMENT  OF  B.  S.  LOVETT,  ESQ., 
Representing  the  Union  Pacific  Railroad  Company. 

Mr.  LovETT.  If  the  Commission  please,  on  behalf  of 
the  railroad  companies  we  represent,  particularly  the 
Union  Pacific  and  the  Southern  Pacific  systems,  we  wish 
to  argue  this  matter  before  the  Commission.  We  have 
attended  the  inquiry  and  hearings  conducted  by  the 
Commission,  and  have  endeavored  to  afford  the  Com- 
mission every  facility  in  the  power  of  these  corporations 
for  an  examination  of  their  relations  and  affairs.  It 
has  been  manifest,  I  think,  to  everyone  during  the 
course  of  the  inquiry  that  the  real  object  of  the  investi- 
gation, so  far  as  developed  by  questions  propounded  by 
counsel  at  the  hearings  of  the  Commission,  was  to  ascer- 
tain whether  there  had  been  a  violation  of  the  anti-trust 
law  or  whether  the  relations  of  the  Union  Pacific  and 
the  Southern  Pacific  and  their  present  methods  of  man- 
agement are  inconsistent  with  the  anti-trust  law. 

Of  course  we  will  not  undertake  to  follow  in  argu- 
ment the  range  of  the  testimony.  Obviously  there  were 
a  multitude  of  facts  developed  which  can  not  be  very 
material  now ;  and  as  we  feel  that  the  real  question  be- 
fore the  Commission,  as  far  as  those  railways  are  con- 
cerned, is  whether  their  relations  are  consistent  with  the 


42 

anti-trust  law,  I,  at  least,  will  confine  my  discussions 
largely  to  that  question. 

It  is  true,  as  I  understand,  that  this  Commission  is 
not  charged  with  the  duty  of  enforcing  that  law,  but  it 
has  collected  the  evidence  bearing  upori  the  relations  of 
the  two  companies  and  their  management,  and  the 
counsel  who  appear  for  the  Commission  have  indicated 
that  that  is  what  they  conceive  to  be  the  material  issue 
before  the  Commission,  and  I  take  it  you  ultimately  will 
make  some  report  upon  this  matter.  We  feel  deeply 
that  there  is  nothing  illegal  in  the  ownership  of  the 
stock  of  the  Southern  Pacific  by  the  Union  Pacific, 
nothing  illegal  in  their  relations,  and  as  we  have  not 
attempted  to  develop  our  position  with  reference  to 
that  heretofore  we  think  it  is  only  fair  to  the  Commis- 
sion and  fair  to  the  stockholders  of  these  companies 
that  our  view  of  the  legal  aspect  of  this  question 
should  be  presented. 

Of  course  we  have  here  no  complaint  and  no  issue 
joined,  and  we  are  almost  forced  to  make  our  own 
selection  of  the  topics  for  discussion. 

I  shall  have  but  very  little  to  say  about  the  Chicago  & 
Alton  matter,  because  Mr.  Cravath  has  presented  that 
so  fully,  but  I  have  tabulated  some  figures  appearing 
from  the  evidence  in  the  record  that  I  think  bear  upon 
some  points  that  have  been  suggested  in  the  discussion 
between  Mr.  Cravath  and  the  members  of  the  Commis- 
sion that  I  shall  present,  and  I  shall  do  that  before  I 
pass  to  the  discussion  of  the  question  in  respect  to  the 
relations  of  the  Union  Pacific  and  the  Southern  Pacific. 

All  the  criticism  aroused  by  republishing  the  facts 
fully  published  seven  yeai-s  ago  in  reference  to  the 
Chicago  &  Alton  seems  to  have  been  visited  upon  Mr. 
Harriman.  He  has  not  attempted  to  shirk  any  of  the 
responsibility,  but  I  think  has  been  overgenerous  in 
assuming  it.  He  was  but  one  of  four,  as  shown  by  all 
the  records  introduced;  but  the  four,  namely,  Messrs. 
Harriman,  Gould,  Scliiff,  and  Stillman,  who  appear  of 
record  as  the  owners  of  97  per  cent  of  the  stock,  were 
merely  the  representatives  of  a  syndicate  of  more  than 
one  hundred  individuals  and  firms,  and  consequently 


43 

got  but  a  comparatively  small  share  of  whatever  profit 
was  realized  instead  of  all,  as  seems  to  be  assumed. 

I  take  it  that  the  value  of  the  Chicago  &  Alton,  as 
the  value  of  any  other  property,  depended  upon  its 
assets  and  its  earning  capacity,  and  according  to  both 
of  those  standards  the  property  at  the  time  of  this  pur- 
chase was  worth  approximately  $59,000,000.  Mr.  Black- 
stone,  the  former  president  of  the  company,  in  his  re- 
port to  the  stockholders  for  the  year  1894,  as  Mr.  Cra- 
vath  has  pointed  out,  called  attention  to  the  fact  that 
the  capitalization  of  the  company  was  less  than  60  per 
cent  of  the  actual  investment  in  the  property.  In  his 
report  for  the  year  1898,  which  was  the  last  report  he 
made  to  the  stockholders,  he  spoke  of  the  dividends  that 
the  company  had  paid.  I  will  read  a  paragraph  from 
that  report : 

"  Much  comment  has  recently  been  published  in  the 
newspapers  relative  to  the  reduction  of  dividends  by 
your  company  from  8  per  cent  to  7J  per  cent  in  1897 
and  7  per  cent  in  1898.  An  unfavorable  deduction  as 
to  the  value  of  your  road  appears  to  have  been  drawn 
therefrom.  I  trust  I  may  for  that  reason  be  pardoned 
for  reading  certain  statements  heretofore  made  which 
show,  among  other  things,  that  a  reduction  of  the  divi- 
dends is  not  without  a  precedent  in  the  history  of  your 
company.  The  dividends  paid  in  cash  upon  the  com- 
mon stock  of  your  company  during  the  last  thirty-five 
years  are  equal  to  an  average  of  8.36  per  cent  per  an- 
num. The  average  dividends  for  the  last  eighteen 
years,  including  7^  per  cent  paid  in  1897  and  7  per  cent 
in  1898,  is  a  fraction  more  than  8  per  cent  per  annum." 

That  is  evidence  of  the  value  of  the  property  of  the 
company  and  of  its  stock  as  shown  \jy  the  rate  of  divi- 
dends that  had  been  maintained  through  a  series  of 
thirty-five  years. 

Then,  as  to  the  value  of  the  property  in  excess  of  the 
par  vahie  of  the  capital  obligations  of  the  company,  he 
made  the  statement  in  the  annual  report  for  1894,  which 
has  been  read  by  Mr.  Cravath  and  which  I  need  not 
repeat. 

Now,  in  respect  to  the  latter  statement — that  is  to 
say,  the  statement  to  the  effect  that  the  capitalization 


44 

was  less  than  GO  per  cent  of  the  value  of  the  property, 
I  have  had  some  figures  made.  Taking  60  per  cent — 
although  less  than  60  per  cent  is  mentioned — on  the 
$35,492,000  outstanding  obligations  at  the  time  the  syn- 
dicate bought  the  stock,  would  bring  the  actual  cost  of 
the  property  in  1894  up  to  $59,153,000.  That  is  to  say, 
that  the  amounts  originally  paid  in  on  the  stock,  sm- 
tually  expended  upon  the  property  by  the  holders  of 
the  stock  and  received  as  the  proceeds  of  bonds  sold  and 
put  into  the  property  and  the  amounts  over  and  above 
the  ordinary  expenditures  for  maintenance  which  had 
been  expended  for  betterments  and  additions,  made  the 
actual  investment  in  the  property  upward  of  $59,000,- 
000.  or  $24,000,000  in  excess  of  the  capital  obligation. 

Then  followed  Mr.  Blackstone's  circular,  in  February, 
1899,  advising  the  stockholders  against  the  acceptance 
of  the  offer  made  openly  of  $200  for  the  preferred  and 
$175  for  the  common  stock,  and  promising  that  in  the 
event  they  should  not  sell  he  would  recommend  the 
declaration  of  a  stock  dividend. 

At  the  time  of  this  purchase — to  digress  a  moment 
from  the  figures  I  have  here — at  the  time  this  syndicate 
purchased  the  stock,  in  January,  1899,  the  surplus  of 
the  company,  as  shown  by  its  books,  was  a  little  up- 
ward of  $2,000,000.  The  Commission  is  familiar  with 
the  report,  made  after  the  syndicate  purchase,  by  Presi- 
dent Felton,  that  he  had  found,  charged  against  in- 
come capital  expenditures  exceeding  $12,000,000,  and 
the  board  ordered  the  accounts  restated,  so  as  to  add 
that  to  the  capital  account.  That  made  a  surplus  of 
about  $14,000,000— a  little  upward  of  $14,000,000.  Six 
million  six  hundred  thousand  dollars  of  that  surplus 
was  distributed  by  a  cash  dividend.  That  left  about 
$8,000,000  surplus,  and  the  discount  on  the  bonds  to 
the  extent  of  $8,000,000  was  charged  against  that  sur- 
plus; in  other  words,  the  cash  dividend  and  the  dis- 
count on  the  bonds  disposed  of  the  surplus,  as  I  under- 
stand the  record ;  the  reason  why  that  particular  amount 
of  $8,000,000  was  charged  against  the  surplus,  as  I  un- 
derstand, was  that  it  eliminated  the  surplus — absorbed 
the  surplus. 


45 

Commissioner  Clements.  AMiat  do  you  mean  by  dis- 
count on  the  bonds  ? 

Mr.  LovETT.  I  mean  the  difference  between  65  per 
cent,  the  price  at  which  they  were  sold,  and  the  par 
value.  That  amounted,  as  I  recall  the  figures,  to  about 
$11,000,000. 

Mr.  CrxVvath.  The  larger  proportion  of  it  was  charged 
to  surplus. 

Mr.  LovETT.  Yes ;  and  the  balance  of  the  surplus  was 
absorbed  in  that  way. 

Observe  here  that  you  can  not  treat  the  cash  dividend 
of  30  per  cent  and  the  sale  of  the  bonds  at  65  as  iso- 
lated transactions.  You  can  not  separate  them  from 
the  general  transactions  of  the  syndicate,  the  general 
result  to  those  who  participated  in  the  syndicate. 

The  operations  of  the  syndicate  resulted  in  this: 
For  $3,479,500  of  the  preferred  stock  of  the  old  com- 
pany, at  200,  the  amount  they  paid,  was  $6,959,000. 
For  $18,751,500  of  common  stock,  at  175,  they  paid 
$32,814,425.  That  made  an  investment  in  the  stocks 
of  the  old  company  by  the  syndicate  of  $39,773,425. 
Now,  $32,000,000  of  3  per  cent  bonds,  at  65,  cost  the 
syndicate  $20,800,000. 

The  Peoria  &  Springfield  line  cost  $3,000,000.  In 
this  table  I  have  before  me  there  is  added  $500,000  for 
expenses,  commissions  paid  Mitchell  and  others  for 
buying  the  stock,  counsel  fees,  and  the  various  expenses 
that  attend  an  enterprise  of  that  sort. 

That  brings  the  total  investment  of  the  syndicate  up 
to  $64,073,425.  Now,  they  received  back  very  soon 
afterwards,  I  believe  it  was  in  May,  1900,  $6,669,180  by 
way  of  the  30  per  cent  cash  dividend.  That  brought 
the  outlay  of  the  syndicate  down  from  $64,000,000  to 
$57,404,245.  That  was  the  money  that  the  participants 
in  this  syndicate  had  to  raise.  Each  according  to  his 
own  share  contributed  money  which,  in  the  aggregate, 
amounted  to  $57,404,000. 

Now,  for  that — eliminating  the  details  of  the  method 
of  procedure — for  that  what  did  the  syndicate  get? 
What  did  they  have  to  show  for  this  $57,000,000  cash  ? 


46 

They  had  $32,000,000  of  Chicago  &  Alton  3  per  cent 
bonds. 

I  will  state  here,  by  way  of  parenthesis,  that  the  re- 
mainder of  the  issue  of  3  per  cent  bonds  was  sold  after- 
wards from  time  to  time  by  the  company -at  83  and  8^, 
and  along  there.  They  were  not  in  the  syndicate  trans- 
action. They  were  the  reserve  securities  that  were 
issued  from  time  to  time  for  improvements. 

Mr.  MiLBURN.  They  brought  83  and  83^  ? 

Mr.  LovETT.  Eighty-three  to  83f.  They  were  sold 
in  lots  from  time  to  time. 

Mr.  Severance.  Were  they  not  collateral  ? 

Mr.  Kellogg.  The  testimony  shows  the  remainder  of 
them  were  up  for  collateral,  $7,000,000  of  them. 

Mr.  LovETT.  The  testimony  of  your  man  Hillard 
shows  $5,000,000  sold. 

Mr.  Kellogg.  I  do  not  see  it. 

Mr.  Severance.  I  think  you  will  find  that  $5,000,000 
is  the  sum  of  money  for  which  $7,000,000  of  the  bonds 
were  pledged  as  collateral. 

Mr.  Cravath.  There  are  $37,350,000  outstanding. 

Mr.  LovETT.  Of  those  bonds  outstanding. 

Mr.  Kellogg.  Where  do  you  get  that? 

Mr.  LovETT.  From  page  179  of  the  print  of  the  ex- 
hibits I  have,  Hillard  Exhibit  No.  1.  After  showing 
the  disposition  of  the  $32,000,000  of  bonds  it  says : 

"Additional  bonds  under  this  mortgage  were  issued  as 
follows : 

"  '  September  7,  1904,  for  acquiring  the  railroad  for- 
merly belonging  to  the  Quincy,  Carrolton  &  St.  Louis, 
$350,000.' " 

Mr.  Kellogg.  Those  were  in  addition  to  the  $40,000,- 
000,  no  part  of  the  $8,000,000. 

Mr.  Lo\'ETT.  The  mortgage  provides  for  an  issue  of 
$40,000,000  and  an  additional  issue  afterwards  of 
$5,000,000, 1  believe,  for  improvements.  I  am  speaking 
of  the  total  issue  of  3  per  cent  bonds  under  the  mort- 
gage. They  are  exactly  in  the  same  rank,  the  same 
class,  and  a  part  of  the  same  issue. 

Mr.  Kellogg.  Certainly. 


47 

Mr.  I^VETT.  I  do  not  care  which  pdrticular  pro- 
vision of  the  mortgage  they  were  issued  under.  They 
were  bonds  issued  under  and  secured  by  this  mortgage 
and  were  exactly  on  the  same  footing  as  the  other. 

March  81,  li)0."),  they  issued,  in  accordance  with  sub- 
division 3,  article  3,  refunding  mortgage  bonds  for  bet- 
terments, sold  at  83i,  $2,000,000.  July  31,  1905,  they 
issued,  in  accordance  with  subdivision  3,  article  3,  sold 
at  83f,  $3,000,000.  That  makes  $5,350,000  that  were 
sold. 

Now,  some  of  the  bonds  are  up  as  collateral — have 
never  been  actually  sold.  There  is  a  total  issue  pro- 
vided for  in  the  mortgage,  I  believe,  of  $45,000,000,  but 
the  syndicate  bonds,  the  bonds  that  the  syndicate  took 
under  this  subscription  at  65,  aggregated  $32,000,000, 
^nd  that  is  the  issue  I  am  dealing  with. 

Now,  to  return.  The  syndicate  received  for  the  in- 
vestment of  $57,404,245,  made  in  the  way  I  have  indi- 
cated, $32,000,000  of  the  3  per  cent  bonds,  $22,000,000 
of  the  3^  per  cent  bonds,  $20,000,000  of  the  preferred 
stock,  and  $20,000,000  of  the  common  stock. 

I  believe  it  was  stipulated  in  New  York  that  the 
Financial  Chronicle  might  be  referred  to  as  if  in  evi- 
dence, and  I  have  tabulated  here  from  the  Financial 
Chronicle  the  high  and  low  prices  for  all  of  these  se- 
curities on  the  New  York  Stock  Exchange  since  they 
were  listed  in  October,  1900,  down  to  date  and  have 
furnished  counsel  a  copy.  That  shows  that  these  3  per 
cent  bonds  never,  after  they  were  listed,  sold  as  high 
as  96. 

I  will  leave  this  with  the  Commission.  It  gives  the 
high  and  low  price  each  month  for  the  3  per  cent  bonds, 
the  3^  per  cent  bonds,  the  preferred  stock,  and  the 
common  stock.  I  think  it  will  be  apparent  to  anyone 
who  examines  the  list  that  the  average  during  this 
l^eriod — from  the  time  the  new  securities  were  listed  in 
October,  1900,  to  date — will  not  be  over  82  or  83  per 
cent  for  the  3  per  cent  bonds;  that  the  average  for  the 
3i  per  cent  bonds  will  not  be  far  from  75,  and  that  the 
average  for  the  preferred  stock  will  be  arounc^75. 
3568—07  M 4 


48 


(The  paper  referred  to  is  as  follows:) 

CHICAGO   &  ALTON   RAILWAY  COMPANY. 
Prices  on  New  York  Stock  Exchange  from  October,  1900,  to  March,  1907. 


Year  and 
mouth. 


1900. 
October . . . 
November 
December. 

1901. 

January 

February  .. 

March 

April 

May 

June 

July 

August 

September . 

October 

November  . 
December.. 


Common 
stock. 


High.  I  Low. 


1902. 
January... 
February  . 

March 

April 

May 

June 

July 

August 

September . . . 
October . . . 
November  . . . 
December 

1903. 

January 

Februar>' 

March 

April 

May 

June 

July 

August 

September . . . 

October 

November  . . . 
December 


36} 
41} 
42 


41i 

401 

43| 

50i 

49i 

49 

45} 

41i 

40} 

38 


37} 

36} 

39i 

39i 

39 

45| 

444 

43J 

m 

36} 
34} 


36} 

34} 

324 

318 

28i 

26J 

24i 

23J 

281 

33 

36 


Preferred 
stock. 


High.    Low. 


31 

33 
37} 


38j 

38i 

4l| 

27 

43 

34i 

36 

36 

36 

35i 

32 


334 

33} 

354 

36i 

35i 

36i 

37 

414 

344 

33} 

30 

294 


34} 

334 

304 

28 

274 

25 

19J 

19 

184 

204 

274 

32J 


72t 
774 
784 


76i 

754 

78 

824 

82 

82 

79} 

78} 

794 

784 

784 

78 


774 

774 

764 

774 

774 

77i 

79 

774 

764 

75 

73} 

72 


73i 

72 

714 

704 

704 

684 

674 

654 

64 

651 

704 

754 


684 
744 


724 
74 

744 
76 

724 

78 

74J 

75i 

764 

76} 

76} 

75} 


76 

754 

75 

754 

754 

744 

744 

77f 

73 

714 

68 

694 


71 

714 

68 

67} 

67f 

664 

64} 

61 

60 

60 

64 

684 


Common      Preferred 
Year  and  stock.      I      .stock, 

month. 


High.  Low.  iHigh.  Low 


1904. 

January 

February  

March 

April 

May 

June 

July 

August 

September . . . 

October 

November  ... 
December 

1905. 

January 

February  

March 

April 

May 

June 

July 

August 

September  . . . ! 

October ' 

November  ...' 
December 

1906.  i 

January I 

February j 

March I 

April 

May 

June 

July 

August 

September . 

October I 

November  .. 
December 

1907. 

January 

February  

March 


384 

40 

40 

38} 

384 

38J 

414 

42 

42 

40 

474 

45 


434 

434 

444 

424 

35f 

36 

374 

42i 

36} 

36} 

34 

33 


38 

324 

314 

35 

30 

304 


324 
35| 
32} 
314 


274 
224 
20 


33 
34 
35} 
374 
354 
364 
384 
394 
394 
36} 
37} 


404 

414 

38f 

324 

31 

35 

35 

354 

36J 

34 

324 

30 


30 

30 

314 

304 

26 

30 


854 

85 

83 

82 

814 

81 

81 

83 

844 

80 

85 

86 


834 

82} 

834 

83} 

79} 

8I4 

81 

81} 


254 
29 
294 
264 


244 

18 

14} 


791 

774 
76 


80i 
794 

78} 
764 
77 
78} 


754 
774 
764 
75 


654 
61* 


75 

814 

80 

804 

804 

8O4 

80 

82 

80 

80 

83 

824 


80 
82 
80 
80 
774 
774 
784 
80} 


75 
76 
7-H 


744 

79 

784 

744 

74 

764 


754 
754 
75 
70 


654 

65 

69 


49 

CHICAGO  &   ALTON   RAILWAY   COMPANY. 
Prices  on  New  York  Slock  Exchange  from  October,  1900,  to  March,  1907. 


3i  per  cent    R«f»°ding 

Year  and           bonds.         '  g^^^^f  ^ 
Month.       t 


High.  Low.  High.  Low 


1900. 

October. I  84 

November  . . .  ]  8o| 

December j  86 

1901.         I 

January <  85 

February j  66 

March |  85* 

Anril ,  861 

J4ay 86 

June 87i 

Julv I  85t 

.\ugust I  85 

September...!  85 

October ;  85i 

November  ...|  864 

December '  864 

1902. 

January 84i 

February 841 

March I  84| 

86 


April. 

May 

June 

July 

August 

September . . . 

October 

November 

December 

1903. 

January », 

February  

March 

April 

May 

June 

July 

August 

September . . . 

October 

November . . . 
December 


83} 
8Si 
S2i 
81* 

81 
81 


79* 

78* 

77* 

77 

T7* 

76* 

74} 

731 

73* 

75 

74* 

76* 


81* 
82* 
84* 


83* 
84* 

841 

84* 

84* 

86 

84 

84 

84 

84* 

84* 

851 


84* 

84 

84 

84* 

84 

85 

83 

81} 

81 

79 

78} 

78 


78 

77 

75 

74 

76 

75} 

71 

70} 

T2k 

71* 

72* 

73 


94 

92* 

93* 

90 

91i 

92* 

90 

89 

88 

88 

87* 


88 

88 

87* 

86 

86 

85* 

86 

85 

85* 

83* 

82* 

83* 


83* 

83* 

83 

82* 

82 

811 

81 

81* 

81* 

83 

821 

82 


92} 


93 

92* 

93* 

90 

91* 

92* 

90 

88 

87* 

86 

87 

87* 


Year  and 
month. 


87* 

87* 

87* 

85 

85 

86 

85 

84* 

84*    '  1906. 

82*  I  January 

82*  i   February  ... 
82*      March 

April 

May 

82}      June 

83*      July , 

82    !    Augiwt 

September . . . 

October 

November  . . . 

December 


80 

811 

81 

80* 

80* 

81  1907. 

79}     January.. 

81*      February 

81    II  March  ... 


1904. 
January. 

February  

March 

April 

May 

June 

July 

August 

September 
October . . . 
November 
December 

19a5. 

January 

February  ... 

March 

April 

May 

June 

July 

August 

September . . 

October 

November  . . 
December... 


3*  per  cent 

bonds. 

High. 

Low. 

77 

74* 

76} 

76 

77* 

75 

77} 

76 

80 

77* 

79} 

78* 

79 

78} 

79{ 

78 

80* 

79 

81* 

80 

82} 

80* 

82} 

82 

83 

80* 

821 

82 

82* 

81} 

82* 

81* 

82* 

80* 

82 

80* 

80* 

79} 

83* 

80 

83* 

82* 

82} 

81 

81* 

80* 

80} 

79* 

81* 

78* 

82 

80* 

80} 

80 

80* 

80* 

79} 

78 

80* 

78* 

78 

76} 

77* 

76} 

77} 

77 

80} 

78* 

78* 

77 

78 

76* 

761 

73} 

74* 

72} 

72 

67} 

Refunding 

3  per  cent 

bonds. 


High.  Low. 


83 

84 

84* 

83* 

83* 

85 

ai* 

84 

85 

83* 

85 

85 


85 

85* 

86} 

85 

85} 

85* 

86 

8o 

85 

83* 

83* 

83* 


m 

824 

82 

80* 

80* 

80* 

81 

80* 

80* 

83 

80* 

79} 


80 
80 
78* 


81* 

82 

83* 

82* 

83 

82} 

84 

84 

84} 

83 


841 
85 
86 
84* 
84* 
84} 
84} 
84} 
84* 
82| 
82* 
82* 


82* 

81* 

81 

80 

80 

79 

80* 

80 

80* 

78* 

80* 

79* 


79 
78* 
76 


50 

Mr.  LovETT.  Now,  the  question  here  is  not  the  rate 
at  which  the  3  per  cent  bonds  were  subscribed,  but  what 
the  syndicate  could  realize  from  these  securities,  how 
they  could  get  back  the  $57,000,000  which  they  unques- 
tionably invested,  and  which  was  represented  by  these 
securities.  If  the  3  per  cent  bonds  had  been  sold  at  80, 
which  is  about  the  average  price  during  the  past  six 
years,  in  order  to  get  back  the  money  it  had  invested 
the  syndicate  would  have  to  sell  the  preferred  stock  at 
77  and  the  3^  per  cent  bonds  at  75.  At  these  prices  the 
securities  would  have  produced  a  few  dollai-s  more  than 
the  $57,000,000  they  had  invested. 

So  that  really  you  may  vary  those  figures  as  you 
choose.  If  you  raise  the  price  o*f  the  3  per  cent  bonds, 
you  must  pull  down  the  price  of  the  other  securities. 
That  is  what  those  securities  represented. 

Commissioner  Lane.  I  do  not  see  that.  Why  do  you 
have  to  bring  down  the  price  of  the  other  securities? 

Mr.  LovEiT.  Well,  I  am  not  sure  that  I  see  that  my- 
self, as  I  recall  the  statement. 

Mr.  Severance.  To  get  the  same  total,  you  mean? 

Mr.  LovETT.  They  had  this  amount  of  securities  and 
if  they  got  more  than  80  for  the  3  per  cent  bonds,  of 
course  the  difference  between  the  figures  that  I  have 
named  here  and  whatever  they  got  for  the  bonds 
would  be  profit.  If  they  got  more  than  75  for  the  3^ 
per  cent  bonds  the  difference  between  75  and  what  they 
sold  for  would  represent  profit,  and  so  if  they  got  more 
than  77  per  cent  for  the  preferred  stock,  the  difference 
between  that  figure  and  what  they  sold  for  would  repre- 
sent profit.  These  prices  are  assumed  as  indicating 
what  these  securities  cost  the  syndicate. 

In  order  to  get  back  their  money — ^$57,404,245 — they 
would  have  to  realize  these  prices  or  prices  averaging 
this  rate.  In  other  words,  if  you  count  the  3  per  cent 
bonds  at  65,  it  does  not  represent  the  cost  to  these  people 
of  their  participation  in  the  syndicate.  You  must  raise 
very  nnich  the  price  of  the  j)ref erred  stock  and  the  3^ 
per  cent  bonds  in  order  to  make  up  the  $57,404,245  that 
it  was  necessary  for  them  to  realize  in  order  to  get  back 
the  money  they  had  invested. 


51 

Coininissioner  Clark.  To  sum  it  all  up.  they  paid 
$.57,000,000  for  that  property,  they  reorganized  it,  and 
they  issued  $94,000,000  par  value  of  securities? 

Mr.  I^)VETT.  Yes,  sir ;  they  issued  $9-4,000,000  of  par 
value  for  what  cost  them  $57,000,000.  That  is  a  clear 
and  graphic  way  of  stating  it.  Now,  what  they  got  for 
it  depended,  of  course,  not  upon  the  par  value  of  the 
securities,  but  upon  what  they  succeeded  in  selling  those 
securities  for. 

Commissioner  Clark.  It  would  depend  altogether 
upon  when  and  how  they  sold  them  ? 

Mr.  TjOvett.  Yes;  and  of  course  what  they  would 
get  for  them  would  depend  on  how  and  when  they  sold 
them,  and  the  table  here  shows  the  prevailing  pricas 
from  that  period  down  to  date  upon  the  New  York 
Stock  Exchange. 

I  think  it  is  fair  to  say,  from  that  table,  that  they 
probably  did  not  average  over  25  for  the  common  stock 
if  they  sold  it.  That  was  clear  profit.  Twenty  million 
dollars  in  round  numbers  of  the  common  stock  at  25 
would  be  $5,000,000  of  profit,  and  I  think  that  is  a  good 
price  to  assume  that  they  received  for  that  amount  of 
stock.  Then  whatever  they  got  for  these  3  per  cent 
bonds,  if  the  participants  sold  them,  or  whatever  they 
got  in  excess  of  these  prices  I  have  assumed  here — 80  for 
the  3  per  cent  bonds,  75  for  the  3^  per  cent  bonds,  and 
77  for  the  preferred  stock — would  be  profit;  but  I  sub- 
mit if  you  compare  these  figures  with  the  prevailing 
prices  you  will  see  that  the  profits  on  those  issues  could 
not  have  been  very  large,  and  we  must  realize  we  are 
dealing  here  with  an  investment  of  $57,000,000  of  cash. 

Commissioner  Lake.  According  to  your  figures  and 
estimates,  it  does  not  mean  much  more  than  $60,000,000, 
taking  the  averages  you  have  given  on  the  bonds  and 
the  averages  on  the  stocks.  Figuring  the  common  stock 
in  at  25,  it  does  not  leave  much  more  than  $60,000,000  in 
return  for  their  $57,000,000  investment. 

Mr.  LovEiT.  It  would  leave  them,  according  to  my 
figures,  $62,000,000  for  an  investment  of  $57,000,000. 
That  is  to  say,  these  prices  that  I  have  named  pro- 
duced $57,000,000,  which  was  the  amount  of  their  in- 


52 

vestment,  and  then  the  common  stock,  at  25,  would  pro- 
duce $5,000,000  more,  and  whatever  profit  they  made  out 
of  it  was  made  out  of  the  common  stock,  and  any  prices 
in  excess  of  those  I  have  named  in  this  statenient.  I 
have  no  doubt  that  if  they  sold  these  bonds  thev  did 
sell  for  something  above  80.  How  much  I  do  not  know. 
The  record  does  not  show  and  nobody  knows,  of  course, 
unless  you  get  everybody  and  ask  each  one  what  he  sold 
for.  But  the  highest  quotation  of  the  3  per  cent  bonds 
during  the  year  1906,  that  has  just  closed,  and  down  to 
date  this  year  Avas  82^.  The  highest  quotation  for  the 
3  per  cent  bonds  in  1905  was  86.  The  highest  for  the 
year  190-4  was  85.  I  am  giving  you  the  highest  quota- 
tion on  the  Xew  York  Stock  Exchange  for  the  bonds 
during  that  period.  It  was  an  experiment  in  issuing  3 
per  cent  securities,  and  when  first  issued  seem  to  have 
sold  higher  than  they  have  ever  sold  since. 

Commissioner  Clements.  If  the  plan  presented  in 
the  case  involved  only  the  rights  and  interests  of  the 
syndicate  and  the  old  stockholders  and  corporation,  the 
stockholders  among  themselves,  that  is  one  thing,  but 
the  effect  upon  the  public  is  another. 

Mr.  LovETT.  Yes;  I  shall  be  very  glad,  Mr.  Com- 
missioner, to  discuss  that  feature  of  it.     I  am  not  here 
as  an  advocate  of  the  issuance  of  fictitious  securities 
or    of    securities    in    excess    of    the    real    investment. 
I  have  some  views  upon  that  subject.     They  are  not 
matured.     I  am  not  a  statesman,  but  simply  a  lawyer, 
and  I  deal  with  the  legal  aspects  of  the  situation  only. 
I  do  not  understand  that  the  par  value  of  stocks  and 
bonds  is  anything  more  than  one  circumstance  out  of  a 
great  many  to  be  taken  into  account   by  any  public 
tribunal  charged  with  the  duty  of  fixing  rates.    The  Su- 
preme Court  of  the  United  States,  in  the  Nebraska  rate 
case,  specified  a  number  of  circumstances  which  might 
be  taken  into  account.     It  did  not  undertake  to  say  the 
particular  value  that  should  be  attached  to  one  circum- 
stance as  against  another,  but  the  par  value  of  secur-  . 
ities  is  a  mere  circumstance  to  be  taken  into  account. 

The  Supreme  Court  of  the  United  States  many  years 
ago  held  in  the  case  of  Dow  r.  Bedelman,  125  U.  S., 


63 

that  the  amount  of  stocks  and  bonds  was  not  even  prima 
facie  evidence,  did  not  make  out  a  prima  facie  case  in  a 
suit  attacking  a  system  of  rates  established  by  a  State 
tribunal. 

I  think  it  is  a  circumstance,  as  the  court  in  the  Ne- 
braska rate  case  has  said,  that  ought  to  be  taken  into 
account,  but  I  do  not  think  that  anybody  charged  with 
the  duty  of  making  rates  would  attach  very  much  im- 
portance to  that  circumstance  alone.  The  natural  in- 
quiry would  be,  What  do  the  stocks  and  bonds  repre- 
sent? What  are  they  worth?  And  you  fall  back  on 
the  question  as  to  the  value  of  the  property;  that  is 
inevitable  in  every  controversy  of  that  sort. 

My  own  view  is  that  entirely  too  much  importance 
has  been  attached  in  the  public  mind  and  in  legislation, 
and  in  public  discussions  generally,  to  the  par  value 
of  stocks.  I  think  it  ought  to  be  treated  as  wholly 
without  legal  significance.  We  all  know,  of  course, 
that  a  share  of  stock  is  simply  an  evidence  or  a  specifi- 
cation of  the  particular  interest  that  each  individual 
has  in  the  net  assets  of  the  corporation.'  That  is  all  it 
amounts  to.  We  know  that  one  share  of  stock  which 
bears  upon  its  face  a  certificate  that  it  is  a  share  of  $100 
will  sell  for  $10  and  we  know  that  another  certificate 
with  precisely  the  same  recital  will  sell  for  $500.  So, 
as  a  matter  of  fact,  in  everyday  practice  in  the  business 
world  the  par  value  of  stock  is  absolutely  without  any 
significance. 

Suppose  that  in  this  case  instead  of»  issuing  400,000 
shares  of  stock,  as  they  did,  at  an  assumed  value — an 
arbitrary  specified  value — of  $40,000,000  the  organizers 
of  this  company  had  declared  that  the  stock  of  this 
company  should  consist  of  400,000  shares — had  said  not 
a  word  about  the  par  value — of  which  200,000  shares 
should  be  preferred  stock  and  200,000  shares  should  be 
common  stock,  and  that  the  preferred  stock  should  re- 
ceive dividends  at  the  rate  of  $4  per  share — not  4  per 
cent,  but  $4  per  share — before  any  dividends  should  be 
paid  oji  the  common  stock;  not  one  word  about  the 
capital  or  the  amount  of  it,  but  simply  a  division  of 
the  shares.     I  do  not  pretend  to  be  familiar  with  the 


54 

particular  process  that  may  be  prescribed  bv  the  laws  of 
JJlinois,  where  this  company  was  formed,  but  in  the 
absence  of  some  arbitrary  statutory  requirement,  we  all 
know-we  lawyers,  at  least-that  that  would  have  ac- 
comphshed  the  legal  purpose  as  well,  and  would  have 
been  just  as  lawful  as  the  method  that  they  did  pursue 
of  dividmg  it  arbitrarily,  saying  this  common  stock 
represents  $100  a  share. 

^Vhat   would   have   been   the   result?     The   200  000 
shares  of  preferred  stock  would  have  been  selling  on 
the  market  at  $70,  or  $75,  or  $80  per  share,  or  whatever 
the  price  might  be,  and  the  common  stock  would  have 
been  selling  at  $15.  or  $25,  or  $30,  or  $40  per  share 
whatever  the  market  price  happened  to  be.     The  legal 
result  of  the  transaction  would  have  been  precisely  the 
same  as  it  is  to-day.     The  value  of  the  stock  would  have 
been  exact  y  the  same  as  it  is  now  if  no  par  value  were 
^tated  in  the  certificates  for  the  shares.     If  that  course 
had  been  followed,  there  would  not  have  been  anv  ques- 
tion of  watered  stock  or  of  fictitious  values  and  yet 
legally  the  situation  would  have  been  preciselv  the  same 
as  it  IS  to-day. 

For  that  reason  I  say  that  the  importance  of  *ho  par 
value  of  the  stock  is  exaggerated,  and,  as  I  view  it,  in 
the  making  of  rates  it  is  a  circumstance  and,  standing 
alone,  is  a 'trifling  circumstance. 

Commissioner  Clements.  Are  you  speaking  of  stock 
alone  now  ? 

Mr  W.TT.  I  am  sj^eaking  of  stock  alone.  It  stands 
on  a  different  footing. 

Commissioner  Clark.  And  not  of  bonds? 

Mr  I^vETT.  When  we  come  to  a  bond,  that  is  a  form 
of  debt.  I  do  not  care  whether  it  is  a  bond  or  a  prom- 
issory note  or  what  it  is,  it  represents  monev.  It  carries 
with  It  a  fixed  obligation  to  repay 'it  at  some  time. 
Of  coui-se,  in  a  bond  there  is  a  promise  to  pay,  and  it  is 
necessary  m  that  case  that  there  should  be  a  par  value 
because  the  corporation  undertakes  to  pav  a  fixed  sum! 
Ihe  stockholders  collectively,  through  this  fictitious 
person,  undertake  to  repay  on  a  certain  dav  a  fixed  sum 
of  money.     That,  of  course,  is  neceasary;   but  so  far  as 


55 

stock  is  concerned,  it  seems  to  me,  all  the  discussion 
about  watered  stock  and  fictitious  capital  is  unimpor- 
tant as  a  practical  matter. 

Commissioner  Clements.  It  is  quite  a  common  thing, 
when  cases  arise  before  the  Commission  where  the 
rate  of  a  railroad  is  challenged  as  being  unreasonable, 
for  the  defense  to  show  that  their  gross  receipts  are 
so  much,  their  expenses  so  much,  their  fixed  charges, 
including  interest  on  bonds  and  other  things,  so  much, 
and  that  the  surplus  is  gone,  and  there  is  nothing  for 
the  stockholders,  and  therefore  there  can  not  be  an  un- 
reasonable rate  while  that  condition  can  be  shown  by 
the  road.  I  suppose  the  stockholder's  share  represents 
some  investment,  and  if  it  does,  then  it  is  entitled  to 
participate  in  earnings  as  a  return  for  that  investment. 
Would  it  not  become  important  to  know  what  it  is, 
whether  it  is  a  mere  figure  written  on  a  paper,  or 
whether  it  is  so  many  dollars  and  cents? 

Mr.  I^VETT.  I  agree  fully  with  the  proposition  that 
in  any  rate  hearing — any  rate  controversy — where  the 
proposition  is  to  reduce  rates,  the  value  of  the  property 
is  an  important  element.  I  do  not  say  for  a  moment 
that  they  are  limited  to  the  return  on  the  original  in- 
vestment, but  I  do  say  that  on  the  question  of  confisca- 
tion the  value  of  the  property  is  a  prime  consideration. 

I  have  had  to  do,  in  my  limited  practice,  with  a  num- 
ber of  rate  suits,  and  I  know  of  no  case  except  in  the  case 
of  Dow  i\  Bedelman,  in  which  the  lawyers  represent- 
ing the  railroads  felt  safe  in  standing  on  proof  of  the 
amount  of  securities  outstanding,  but  always  went  be- 
hind the  record  and  proved  the  money  invested  in  the 
property,  and  it  is  frequently  a  very  onerous  undertak- 
ing to  attempt  to  show  in  the  case  of  some  of  these  old 
roads  just  what  has  been  invasted. 

Commissioner  Clements.  Judge  Lovett,  we  will  take 
a  recess  now  until  2  o'clock. 

The  Commission,  at  12.3.5  o'clock  p.  m.,  took  a  recess 
until  2  o'clock  p.  m. 


56 


AFTER   RECESS. 

The  Commission  reassembled  at  the  expiration  of  the 
recess. 

Commissioner  Clements.  Judge  Lovett,  you  may 
proceed. 

ARGUMENT  OF  R.  S.  LOVETT  RESUMED. 

Mr.  Lovett.  If  the  Commission  please,  I  have  but 
little  more  to  say  about  the  Chicago  &  Alton. 

Continuing  the  point  that  I  was  discussing  when  the 
recess  was  taken,  in  response  to  a  question  suggested  by 
one  of  the  Commissioners,  I  take  it  that  really  the  best 
evidence  of,  the  safest  guide  to  the  value  of  railroad 
property,  or  any  other  property,  is  the  market  value  of 
its  securities,  where  they  are  largely  dealt  in,  on  the 
market.  I  think  that  is  probably  the  best  evidence  of 
it.  Of  course,  even  that  depends  to  a  considerable  ex- 
tent upon  the  rate  of  interest  the  bonds  bear  and  the 
dividends  the  stock  pay. 

Commissioner  Clements.  And  in  turn  that  would  de- 
pend upon  the  rates  they  are  permitted  to  charge  and 
can  get  ? 

Mr.  Lovett.  Yes.  The  Supreme  Court  in  the  Ne- 
braska case  has  left  that  revolving  in  a  circle ;  but  there 
must  be  some  way  of  arriving  at  the  value  of  railroad 
property.  It  is  to  be  gathered  from  a  great  variety 
of  circumstances,  and  while  there  are  many  circum- 
stances to  be  considered,  it  seems  to  me  that  ordinarily 
and. as  a  general  rule,  that  the  market  quotations  for 
securities  during  a  long  period  of  time  is  probably 
about  the  safest  guide. 

But  the  important  fact,  which  seems  to  be  persistently 
disregarded  in  the  discussion  of  the  Chicago  &  Alton, 
is  the  return  in  the  way  of  interest  or  dividends  upon 
the  capitalization  of  the  property  before  and  after  the 
readjustmept.  The  old  bonded  indebtedness  was  bear- 
ing interest  at  the  rate  of  8  per  cent  and  the  new  at 
3  per  cent  and  3^  per  cent. 

At  the  close  of  the  fiscal  year  June  30,  1906,  it  was, 
roundly  speaking,  six  years  since  the  readjustment  of 
the  finances  of  the  Chicago  &  Alton  occurred.     The  re- 


57 

suits  of  the  readjustment,  therefore,  will  more  clearly 
appear  by  a  comparison  of  the  annual  interest  and  divi- 
dends for  the  year  ending  June  30,  1006,  with  the 
average  payments  for  interest  and  dividends  for  the 
six  years  immediately  preceding  the  readjustment — 
that  is,  the  calendar  years  1894  to  1899,  inclusive. . 

I  have  prepared  here  a  table  showing  the  average 
interest,  rental,  and  dividends  paid  by  the  Chicago  & 
Alton  for  the  six  years  ending  December  31,  1899.  The 
average  yearly  return  upon  the  capitalization  in  the 
way  of  dividends  and  interest  and  rentals  amounted 
to  $2,495,000.  There  are  some  odd  figures,  but  I  use 
only  the  round  numbers. 

The  average  annual  interest  charge  and  dividends  on 
the  securities  taken  over  by  the  syndicate — that  is, 
$32,000,000  of  the  3  per  cent  bonds,  $22,000,000  of  the  3| 
per  cent  bonds,  and  $20,000,000  of  the  4  per  cent  pre- 
ferred stock  has  been  for  the  six  years,  since  the  syndi- 
cate took  over  the  property,  $2,530,000.  But  having 
included  rentals  in  the  statement  of  returns  upon  capi- 
tal for  the  six  years  prior  to  December  31,  1899,  in  order 
to  make  the  comparison  complete  I  add  for  rentals 
$225,000,  which  is  the  average  during  the  six  years 
since  the  acquisition  of  the  property  by  the  syndicate, 
bringing  the  total  average  annual  payment  up  to 
$2,755,000,  or  $279,805  per  annum  greater  than  it  was 
jirior  to  1899.     Now,  against  this  excess 

Commissioner  Lane.  Pardon  me.  Those  figures  do 
not  agree  with  Mr.  Cravath's,  do  they? 

Mr.  LovK'rr.  I  really  do  not  know.  I  do  not  think  he 
used  those  figures. 

Mr.  Cravath.  They  are  arranged  diiferently,  but  I 
think  they  are  the  same. 

Mr.  LovETT.  This  is  the  average  for  a  period  of  six 
years.  I  compare  the  sixth  year  following  the  acqui- 
sition of  the  property  by  the  syndicate  with  the  average 
for  six  years  before. 

Commissioner  Lane.  Does  not  that  include  interest 
on  all  theibonds  and  all  the  dividends  that  were  paid? 

Mr.  LovETT.  During  the  six  years? 

Commissioner  Lane.  Yes. 


58 

Mr.  LovETT.  It  does,  according  to  my  understanding. 

Commissioner  Lane,  Was  there  a  variation  at  that 
time  in  the  dividends  that  were  paid  and  in  the  interest 
that  was  paid  on  the  bonds? 

Mr.  LovETT.  There  were  some  other  securities  issued ; 
for  instance,  that  $5,350,000  in  addition  to  the  $32,- 
000.000;  but  I  am  taking  the  amount  paid  on  the  securi- 
ties that  the  syndicate  took  and  contrasting  it  with  the 
amounts  paid  on  securities  that  were  outstanding  be- 
fore, and,  as  I  say,  annual  disbursements  were  $259,000 
per  annum  greater  after  the  syndicate  acquired  the 
property  than  before. 

Now,  the  syndicate  put  into  the  property  at  once,  as 
shown  by  the  evidence  here  and  by  the  statements  of 
Mr.  Hillard.  $5,559,000.  The '  figures  I  have  are 
$5,745,000,  compiled  by  Mr.  Mahl,  who  tells  me — and 
there  is  a  statement  from  him  in  the  record — that  in 
Mr.  Hillard's  statement  he  failed  to  take  into  account 
certain  expenditures  that  were  made. 

Mr.  Kellogg.  AMiat  is  that.  Judge  Lovett?  I  did 
not  hear  you. 

Mr.  IjOvett.  I  say  that  Mr.  Hillard's  statement,  at 
page  179,  gives  the  cash  that  went  into  the  treasury  and 
was  subsequently  applied  to  betterments  and  improve- 
ments out  of  this  issue  of  $32,000,000  of  bonds  as 
$5,526,218.  Mr.  Mahl,  who  prepared  the  statement  I 
have,  gives  it  as  $5,745,432.  There  is  a  table  here  from 
Mr.  Mahl,  which  I  can  not  put  my  hands  on  at  the  mo- 
ment, that  gives  the  basis  of  his  computation.  T  use 
his  figures,  assuming  that  they  are  correct.  There  was 
new  capital  of  $5,745,000,  being  part  of  the  proceeds  of 
the  $32,000,000  of  bonds  that  went  into  the  treasury 
and  was  expended  on  the  road. 

In  addition  to  that,  there  was  the  Springfield-Peoria 
line,  costing  $3,000,000,  that  went  in  against  these  se- 
curities.   Part  of  these  securities  went  to  pay  for  that. 

Mr.  Kellogg.  AVhat  did  that  cost? 

Mr.  LoATETT.  Three  million  dollars,  as  all  the  testi- 
mony agrees,  undisputed  in  the  record.  That  makes 
$8,745,000. 

Now,  to  digress  a  moment.     The  3  per  cent  bonds  sold 


59 

at  05,  running  for  fifty  years.  That  was  equivalent  to 
l)orro\viiiir  money  at  4.87,  Tliat  is  to  say,  for  the  $20,- 
800,000  which  the  company  got  as  the  proceeds  of  the 
$:^2,000.000  of  bonds  at  Go,  if  it  had  issued  bonds  for 
the  same  i^eriod  bearing  interest  at  4.87  per  cent  and 
sold  them  at  par  the  result  to  the  company  would  have 
been  the  same. 

In  this  table  I  have  compiled  we  have  computed  the 
interest  on  the  $5,700,000  of  new  money  on  that  basis  of 
4.87  per  cent.  On  the  3^  per  cent  bonds  the  interest 
rate  would  be  4.84  per  cent.  Of  course  the  Commission 
understands  that  there  is  a  regidarly  established  basis 
recognized  in  the  financial  world  for  measuring  the 
value  of  bonds,  depending  upon  the  rate  of  interest  and 
the  time  for  which  they  run,  and  these  figures  are  com- 
piled on  that  basis. 

The  interest  charge  upon  that  new  capital,  the 
$5,700,000  in  cash  and  the  $3,000,000  of  the  Peoria  line, 
making  a  total  of  $8,700,000  at  the  rates  I  have  indi- 
cated, amount  to  $425,002  per  annum. 

Therefore  the  return  on  the  capital  invested  in  the 
property  is  $1G5,000  less  than  it  would  have  been  if 
the  new  money  put  in  had  been  raised  prior  to  the 
recapitalization. 

I  have  furnished  counsel  with  a  copy  of  that  table, 
and  I  will  leave  it  with  the  Commission. 

(The  paper  referred  to  is  as  follows :) 

CHICAGO   &    ALTON. 

Avemge  interest,  rentals,  and  dividends  for  six 

years  (Dec.  31,  1894,  to  Dec.  31,  1899) $2,495,149.20 

Annual    Interest  charges  and   dividends  on   the 
securities  taken  over  by  the  syndicate: 
$32,000,000    C.    &    A.    R.    R.    3 

per  cent  bonds $960,000.00 

$22,000,000   C.   &    A.    Rwy.   3i 

per  cent  bonds 770,000.00 

$20,000,000    C.    &    A.    Rwy.    4 

per  cent  preferred  stock 800, 000.  00 

2,  530, 000. 00 

Rentals 235, 015. 00 

2,755,015.00 

Excess  (assuming  the  entire  $74,000,000 
securities  outstanding) 259,865.80 


60 

Against  this  excess  should  be  credited : 

Interest  on  $5,745,432  new  cap- 
ital, being  part  of  the  pro- 
ceeds of  the  $32,000,000  of 
3  per  cent  bonds  applied  to 
oettermeuts,  improvements, 
and  additions,  at  the  rate  of 
interest  which  the  3  per  cent 
bonds  sold  yielded  if  carried 
to  maturity,  viz,  4.87  per 
cent $279,  802.  54 

Interest  on  $3,000,000  (being 
part  of  the  proceeds  from  the 
sale  of  $22,000,000  3i  per  cent 
t)onds  paid  for  the  Springfield 
&  Peoria  Railway),  at  the 
rate  of  interest  which  the  3i  ' 

per  cent  bonds  yielded  if  car- 
ried to  their  maturity,  viz, 
4.84  per  cent 145,200.00 

$425,  OO'J.  54 

Gain  under  recapitalization 165, 136.  74 

Average  interest,  rentals,  and  dividends  for  six 
years  (Dec.  31,  1894,  to  Dec.  31,  1899) 2,495,149.20 

Interest,  rentals,  and  dividends  for  the  year  end- 
ing June  30,  1906 3,228,864.69 

Increase 733,  715.  49 

Against  this  increase  should  be  credited : 

Interest  on  $19,183,396.19  cap- 
ital expenditures  from  yeai-s 
ending  June  30,  19(X),  to  June 
30,  1906,  capitalized  at  4.87 
per  cent  (the  yield  of  3  per 
cent  bonds  if  carried  to  their 
maturity) $934,231.38 

Interest  on  $3,000,000  paid  for 
Springfield  &  Peoria  Railway, 
capitalized  at  4.84  per  cent 
(the  yield  of  the  3i  per  cent 
bonds  if  carried  to  their  ma- 
turity)      145,200.00 

1,  079, 431.  38 

Gain  under  recapitalization 345,715.89 

Apbil  1,  1907. 


61 

Commissioner  Clements.  That  calculation  is  based 
entirely,  and  you  get  that  result,  on  the  fixed  charges — 
that  is,  the  interest  on  these  bonds? 

Mr.  LovETT.  Yes,  sir. 

Commissioner  Clements.  You  make  no  allowance  for 
any  dividends  on  stock  ? 

Mr.  LovETT.  On  the  common  stock,  no.  I  do  take 
into  account  the  preferred  stock.  That  includes  inter- 
est on  the  two  issues  of  bonds  and  the  4  per  cent  divi- 
dends on  the  preferred  stock,  but  nothing  on  the  com- 
mon stock. 

Commissioner  Clements.  Nothing  on  the  common 
stock  ? 

Mr.  I^ovETT.  No,  sir. 

Commissioner  Clements.  The  common  stock  of  this 
company,  before  it  was  reorganized,  paid  8  per  cent  ? 

Mr.  IjOvett.  Yes,  sir.  Of  course  in  computing  what 
has  been  paid  on  the  capital  we  take  into  account  the 
dividends.  It  is  wholly  immaterial,  from  the  public 
standpoint,  I  take  it,  whether  what  has  gone  to  the 
holders  of  the  securities  of  the  company  was  in  the 
form  of  dividends  or  in  the  form  of  interest. 

Commissioner  Lane.  What  is  the  exact  figure  you 
say  the  company  pays  now,  or  that  the  company  has 
paid  for  the  six  yeai*s? 

Mr.  Lovett.  I  have  here  only  the  average  for  the  six 
years.  The  average  during  the  latter  period  of  six 
years  was  $2,755,015,  as  against  $2,495,149  before. 

Commissioner  Lane.  $2,400,000,  practically  $2,500,- 
000. 

Mr.  Lovett.  $2,495,000.  Leaving  an  excess — that  is, 
a  greater  amount  to  be  paid  by  the  public  upon  the  new 
securities  of  $259,000;  but  over  $8,000,000  of  new  capi- 
tal went  into  the  plant — that  is,  was  added  to  the  prop- 
erty as  the  result  of  this  recapitalization  and,  comput- 
ing interest  upon  that  new  capital  on  the  basis  I  have 
indicated,  would  make  the  gain  under  recapitalization 
$165,000  a  year. 

Commissioner  Clements.  But  if  this  new  common 
stock  is  ever  to  earn  anything,  it  would  increase  the 


62 

charge  on  the  public,  of  course,  to  the  extent  that  it  did 
get  anything. 

Mr.  LovETT.  Undoubtedly.  The  value  of  the  com- 
mon stock  is  entirely  speculative.  There  may  be  a  for- 
tunate condition,  a  great  development  of  business,  un- 
der reasonable  rates  that  would  pay  a  good  dividend  on 
the  common  stock.  The  stockholder  takes  his  chances. 
He  pays  now,  according  to  the  present  quotation,  about 
15  cents  on  the  dollar  for  that  chance.  He  has  paid  on 
an  average,  I  think,  since  the  stock  was  issued  not  over 
30  cents  on  the  dollar  for  that  chance.  That  is  a  specu- 
lative chance. 

Commissioner  Harlan.  Mr.  Lovett,  could  the  con- 
trol of  the  company  be  had  through  the  common  stock 
only? 

Mr.  Lovett.  Xo;  it  would  require  some  of  the  pre- 
ferred. 

Commissioner  Lane.  May  I  ask  you  if  you  can  rec- 
oncile, make  clear  to  me,  the  figures  that  you  have 
given  and  the  figures  that  appear  on  page  12  of 
Mr.  Cravath's  statement,  in  which  he  says  that  the 
average  annual  amount  which  the  Chicago  &  Alton 
Railroad  Company  had  been  paying  out  in  interest  and 
dividends  for  many  years  prior  to  the  reorganization 
was  $2,906,000?  The  annual  fixed  charges  as  of  June 
30,  1906,  including  interest  upon  all  obligations,  rent- 
als, and  4  per  cent  dividends  upon  the  preferred  stock, 
were  $3,228,000,  an  increase  of  only  $321,000.  There 
seems  to  be  a  variance  there  of  about  $70,000  or  $60,000. 

Mr.  Cravath.  In  dealing  with  the  past  I  took  a 
longer  period,  Mr.  Commissioner. 

Commissioner  Lane.  Mr.  Lovett  makes  the  figures 
$2,495,000. 

Mr.  Cravath.  I  took  a  much  longer  period.  Mr. 
McClement  prepared  these  figures,  and  went  back  much 
longer  than  six  years. 

Commissioner  Lane.  Did  they  pay  more  in  the  olden 
times  than  they  did  latterly  ? 

Mr.  Cravath.  Yes;  they  averaged  more  than  8  per 
cent  for  a  considerable  period. 


63 

Mr.  LovETT.  They  paid  10  per  cent  for  a  while,  and 
they  had  not  paid  less  than  8  per  cent  for  eighteen 
years,  until  just  two  years  before  the  syndicate  bought. 

Then  as  to  the  annual  returns  since  the  syndicate  ac- 
quired the  property,  I  presume  Mr.  Cravath  included 
the  entire  amount  of  these  3  per  cent  bonds  outstanding. 

Mr,  Cravath.  Yes. 

Mr.  LovETT.  Probably  car-trust  obligations. 

Mr.  Cravath.  Yes. 

Mr.  LovETT.  As  they  did  not  enter  into  the  transac- 
tions of  the  syndicate,  but  were  issued  in  the  ordinary 
course  of  business,  like  any  other  railroad  issues  obliga- 
tions for  additional  money,  I  have  excluded  them  from 
my  calculation. 

Mr.  Kellogg.  You  had  to  pay  interest  on  them,  did 
you  not  ? 

Commissioner  Lane.  Pardon  me  a  moment.  If  you 
reduce  the  average  from  $2,900,000,  the  amount  in  Mr. 
Cravath's  statement,  to  $2,500,000,  the  amount  in  your 
statement,  and  make  a  difference  of  $400,000  in  the 
increase,  instead  of  the  increase  being,  according  to  his 
figure,  $320,000,  it  should  be  $720,000. 

Mr.  Cravath.  I  think  another  difference  was  largely 
due  to  the  fact  that  the  accountant  who  prepared  my 
figures  took  in  the  interest  on  guaranteed  stocks  at  both 
points.  The  result  of  the  comparison  is  the  same,  but 
it  makes  the  figures  different. 

Mr.  I^VETT.  There  has  been  no  change,  though,  in 
the  guaranteed  stocks.  They  are  outstanding  just  the 
same,  as  I  understand.  They  are  excluded  from  this 
calculation,  because  if  you  include  them  in  one  period 
you  have  to  include  them  in  the  other.  In  my  figures 
they  are  excluded  from  both  periods;  and  then,  as  I 
said  a  moment  ago,  I  have  no  doubt  Mr.  Cravath's 
figures  include  the  interest  on  the  rest  of  the  3  per  cent 
bonds  in  excess  of  the  $32,000,000,  and  probably  interest 
on  car-trust  obligations  and  securities  of  that  sort  that 
had  nothing  to  do  with  the  readjustment. 

Mr.  Cravath.  They  include  all  the  interest  when  this 
statement  was  prepared. 
3568—07  M 5 


64 

Mr.  LovETT.  I  take  the  payments  on  the  new  securi- 
ties that  the  syndicate  received,  and  I  add  to  that  the 
interest  on  the  money  which  the  syndicate  undoubtedly 
put  into  the  property,  leaving  out  money  that  was  real- 
ized from  the  sale  of  these  other  securities  that  are  in- 
cluded in  Mr.  Cravath's  statement. 

Another  statement  here  that  I  will  leave  compares 
the  business  of  the  company  during  the  same  period — 
six  years  before  and  six  years  after.  I  shall  not  dwell 
upon  that,  but  I  call  attention  to  the  fact  that  during 
that  period  the  gross  receipts  of  the  company  increased 
from  $6,292,000  to  $11,586,000. 

The  tons  of  freight  carried  1  "mile  increased  from 
423,000,000  tons  to  1,174,000,000  tons.  I  use  only  the 
round  sums.  The  average  receipts  per  ton  per  mile 
were  reduced  from  $917  to  $639. 

Mr.  Kellogg.  Let  me  have  that  statement,  will  you? 
I  have  not  had  a  chance  to  examine  it.  I  only  saw  it 
this  morning. 

Mr.  LovETT.  Certainly.  Now,  I  think  a  great  deal 
depends  upon  the  method  by  which  this  was  done. 
These  gentlemen  undertook  to  readjust  the  finances  of 
this  company  in  a  somewhat  unusual  way.  If  they, 
when  they  bought  these  securities,  had  held  them  a 
year  or  two  until  those  old  bonds,  bearing  7  and  8  per 
cent  interest,  matured,  as  they  were  about  to  mature, 
and  had  sold  out  that  property  under  foreclosure  and 
probably  with  a  receivership  and  had  bought  it  them- 
selves and  organized  a  company  and  conveyed  this 
property  to  it  and  issued  these  securities  against  it,  I 
do  not  believe  anybody  would  have  had  a  word  to  say 
against  it.  That  is  the  usual  and  the  ordinary  way. 
The  securities  would  not  have  been  worth  any  more  in 
the  market.  The  legal  effect  would  have  been  the  same. 
The  whole  situation  would  have  been  then  just  as  it  is 
to-day,  and  I  do  not  believe  there  would  have  been  a 
word  of  criticism  about  it. 

^Commissioner  Clements.  Well,  it  would  be  a  very 
unusual  thing  for  a  company  the  earnings  of  whose 
road  were  sufficient  to  pay  8  per  cent  for  eighteen  year's 
or  so  to  allow  their  road  to  he  foreclosed  and  sold  at 


65 

public  sale.  That  would  be  a  very  extraordinary  thing, 
would  it  not? 

Mr.  LovETT.  I  do  not  know.  Usually  when  they  are 
paying  large  dividends  they  do  not  go  into  receiver- 
ships; but  I  think  there  are  instances  of  that  sort, 
many  of  them.  They  might  have  done  it  that  way. 
The  situation  admitted  of  many  methods  of  handling. 
The  stockholders  could  have  put  a  mortgage  on  the 
road  and  raised  money  to  refund  this  indebtedness,  or 
instead  of  putting  a  new  mortgage  on  the  property 
they  could  have  waited  until  the  bonds  matured  and 
then  bought  the  property  in. 

That  is  all,  if  the  Commission  please,  I  have  to  say 
with  reference  to  the  Chicago  &  Alton  matter. 

Coming  now^  to  the  relations  of  the  Union  Pacific  and 
Southern  Pacific,  I  want  to  call  the  attention  of  the 
Commission  to  the  important  fact,  at  the  outset,  that 
this  is  not  another  Northern  Securities  case,  that  it  is 
wholly  different,  in  matters  of  fact  and  in  matters  of 
law.  The  Great  Northern  and  Northern  Pacific  rail- 
roads were  two  great  systems  extending  from  the  Lakes 
to  the  Pacific  Ocean,  substantially  alongside  of  each 
other,  not  only  parallel,  but  competitive.  There  was 
scarcely  a  foot  of  that  vast  territory  that  was  not  com- 
petitive between  those  two  roads;  and  any  union  of 
those  lines  naturally  meant  the  elimination  of  all  possi- 
bilities of  competition  between  them.  That  is  not  the 
situation  of  the  Union  Pacific  and  Southern  Pacific. 
They  are  connecting,  not  competing  lines.  They  serve 
different  territories.  Where  their  lines  are  geograph- 
ically parallel,  a  thousand  or  more  miles  intervene, 
which  is  covered  with  a  network  of  competing  lines. 
The  physical  situation,  the  facts,  are  totally  different. 

The  relations  between  the  Union  Pacific  and  the 
Southern  Pacific  arise  wholly  from  the  purchase  and 
ownership  by  the  former  of  about  45  per  cent  of  the 
stock  of  the  latter.  All  their  relations  flow  from  that 
fact.  The  election  or  appointment  of  the  same  per- 
sons to  many  of  the  more  important  offices  and  posi- 
tions of  the  two  companies  is  due  to  it.     The  unity  of 


66 

methods  and,  in  many  respects,  of  management,  is  due 
to  that  fact.  No  court  of  the  United  States  has  yet 
held  that  the  purchase  and  ownership  of  the  shares  of 
one  railroad  company  by  another,  even  if  they  should 
own  competing  lines,  is  a  violation  of  the  antitrust 
act.  I  do  not  mean  to  say  that  if  the  lines  were  di- 
rectly competitive  and  the  purchase  was  for  the  very 
purpose  of  restricting  or  suppressing  that  competition, 
such  purchase  would  not  be  within  the  act.  That  is 
an  open  question,  and  the  facts  in  our  situation  do  not 
present  it.  Such  a  purchase  might  be  the  result  of  a 
conspiracy.  The  act  prohibits  a  "  conspiracy  in  re- 
straint of  trade,"  a  "  combination  in  restraint  of  trade," 
and  a  "  contract  in  restraint  of  trade  " — that  is  to  say, 
a  contract  designed  and  intended  to  restrain  trade. 
The  act  nowhere  in  express  terms  prohibits  a  bona  fide 
purchase  of  the  stock  of  one  corporation  by  another 
corporation  having  the  requisite  power,  without  any 
purpose  to  restrict  or  suppress  competition,  although 
such  may  be  the  eflfect  though  not  the  object  of  the  pur- 
chase. That,  as  I  have  already  indicated,  is  an  open 
question. 

It  is  well  to  bear  in  mind  that  the  decision  of  the 
Supreme  Court  in  the  Northern  Securities  case  pro- 
ceeded solely  upon  the  ground  that  the  organization  of 
the  Northern  Securities  Company  and  the  transfer  of 
the  stock  of  the  Great  Northern  and  Northern  Pacific 
to  it  in  exchange  for  its  own  shares,  did  not  involve 
a  purchase  and  sale,  but  that  the  transaction  was 
the  result  of  a  conspiracy  and  was  but  a  means  to 
accomplish  the  object  and  end  of  the  conspiracy. 
That  is  to  say,  it  found  that  the  persons  in  control 
of  the  two  competing  railroads  set  about  to  devise 
means  for  suppressing  competition  between  them,  and 
as  a  result  of  their  cpnferences,  and  in  furtherance 
of  the  conspiracy  thus  formed  they  organized  the 
Northern  Securities  Company  and  transferred  their 
shares  to  it.  This  being  established,  the  court  held 
that  the  conspiracy  was  unlawful  and,  as  a  conse- 
quence, that  the  Northern  Securities  Company  was  a 
mere  agency  employed  to  carry  out  and  accomplish  the 


67 

unlawful  object.    This  is  well  illustrated  by  passages 
from  Mr.  Justice  Harlan's  opinion. 

At  page  833  of  the  report  Justice  Harlan  said : 

"  It  is  said  that  whatever  may  be  the  power  of  a 
State  over  such  subjects,  Congress  can  not  forbid  single 
individuals  from  disposing  of  their  stock  in  a  State 
corporation,  even  if  such  corporation  be  engaged  in 
interstate  and  international  commerce ;  that  the  holding 
or  purchase  by  a  State  corporation  or  the  purchase  by 
individuals  of  the  stock  of  another  corporation,  for 
whatever  purpose,  are  matters  in  respect  of  which  Con- 
gress has  no  authority  under  the  Constitution ;  that,  so 
far  as  the  power  of  Congress  is  concerned,  citizens  or 
State  corporations  may  dispose  of  their  property  and 
invest  their  money  in  any  way  they  choose,  and  that  in 
regard  to  all  such  matters  citizens  and  State  corpora- 
tions are  subject,  if  to  any  authority,  only  to  the  lawf  id 
authority  of  the  State  in  which  such  citizens  reside,  or 
under  whose  laws  such  corporations  are  organized.  It 
is  unnecessary  in  this  case  to  consider  such  abstract, 
general  questions.  The  court  need  not  now  concern 
itself  with  them.  They  are  not  here  to  be  examined 
and  determined,  and  mav  well  be  left  for  consideration 
in  some  case  necessarily  involving  their  determination." 

Again : 

"  In  this  connection  it  is  suggested  that  the  conten- 
tion of  the  Government  is  that  the  acquisition  and 
ownership  of  stock  in  a  State  railroad  corporation  is 
itself  interstate  commerce  if  that  corporation  be  en- 
gaged in  interstate  commerce.  This  suggestion  is  made 
in  different  ways — sometimes  in  express  words,  at  other 
times  by  implication.  For  instance,  it  is  said  that  the 
question  here  is  whether  the  power  of  Congress  over 
interstate  commerce  extends  to  the  ownership  of  the 
stock  in  State  railroad  companies  by  reason  of  their 
being  engaged  in  such  commerce.  Again,  it  is  said  that 
the  only  issue  in  this  case  is  whether  the  Northern 
Securities  Company  can  acquire  and  hold  stock  in  other 
State  corporations.  Still  further,  it  is  asked,  generally, 
whether  the  organization  or  ownership  of  railroads 
is  not  under  the  control  of  the  States  under  whose  laws 
they  came  into  existence.  Such  statements  as  to  the 
issues  in  this  case  are,  we  think,  wholly  unwarranted 
and  are  very  wide  of  the  mark;  it  is  the  setting  up  of 
mere  men  of  straw,  to  be  easily  stricken  down.  "We  do 
not  understand  that  the  Government  makes  any  such 
contentions  or  takes  any  such  positions  as  those  state- 


68 

ments  imply.  It  does  not  contend  that  Congress  may 
control  the  mere  acquisition  or  the  mere  ownership  of 
stock  in  a  State  corporation  engaged  in  interstate  com- 
merce. Nor  does  it  contend  that  Congress  can  control 
the  organization  of  State  corporations  authorized  by 
their  charters  to  engage  in  interstate  and  international 
commerce.  But  it  does  contend  that  Congress  may  pro- 
tect the  freedom  of  interstate  commerce  by  any  means 
that  are  appropriate  and  that  are  lawful  and  not  pro- 
hibited by  the  Constitution." 

One  more  paragraph  and  then  I  will  stop.  Turning 
to  page  353 — 

"  It  was  said  in  argument  that  the  circumstances 
under  which  the  Northern  Securities  Company  obtained 
the  stock  of  the  constituent  companies  imported  simply 
an  investment  in  the  stock  of  other  corporations,  a 
purchase  of  that  stock,  which  investment  or  purchase, 
it  is  contended,  was  not  forbidden  by  the  charter  of 
the  company  and  could  not  be  made  illegal  by  any  act 
of  Congress.  This  view  is  wholly  fallacious  and  does 
not  comport  with  the  actual  transaction.  There  was 
no  actual  investment,  in  any  substantial  sense,  by  the 
Northern  Securities  Company  in  the  stock  of  the  two 
constituent  companies.  If  it  was  in  form  such  a  trans- 
action, it  was  not  in  fact  one  of  that  kind.  How- 
ever that  company  may  have  acquired  for  itself  any 
stock  in  the  Great  Northern  and  Northern  Pacific  Rail- 
way companies,  no  matter  how  it  obtained  the  means 
to  do  so,  all  the  stock  it  held  or  acquired  in  the  con- 
stituent companies  was  acquired  and  held  to  be  used 
in  suppressing  competition  between  those  companies. 
It  came  into  existence  only  for  that  purpose.  If  any- 
one had  full  knowledge  of  what  was  designed  to  be 
accomplished,  and  as  to  Avhat  was  actually  accom- 
plished, by  the  combination  in  question,  it  was  the 
defendant  Morgan." 

It  is  true  that  in  the  subsequent  case  of  Harriman 
against  the  Northern  Securities  Company  (197  U.  S., 
244)  the  court  said  that  was  a  sale  as  between  the  parties. 
That  was  a  question  where  one  of  the  parties  who  de- 
livered stock  to  the  Northern  Securities  Company  was 
contending  that  it  was  not  a  sale,  and  that  the  whole 
transaction  should  be  rescinded  because  the  scheme  had 
been  held  to  be  illegal,  but  no  court  has  ever  j^et  held, 
so  far  as  I  know,  that  a  bona  fide  purchase  of  the  stock 


69 

of  one  corporation  by  another  corporation  is  in  violation 
of  the  antitrust  act. 

Our  contention  upon  the  facts,  briefly  stated,  is  that 
the  Union  Pacific  and  Southern  Pacific  are  not  compet- 
ing lines,  but  are  connecting  lines ;  that  aside  from  the 
connection  at  Ogden,  where  the  rails  of  the  transconti- 
nental lines  unite,  the  only  common  point  of  the  two  sys- 
tems is  at  Portland,  Oreg. ;  that  the  two  systems  do  not 
serve  the  same  territory,  but  that  so  far  as  their  lines 
are  geographically  parallel  they  are  1,000  miles  or  more 
apart,  with  a  perfect  network  of  competitive  railroad 
lines  traversing  the  territory  between  them;  that  if 
there  was  any  traffic  admitting  of  competition,  the  vol- 
ume of  such  competitive  traffic  is  so  small  in  compari- 
son with  the  total  tonnage  and  revenue  of  each  and  both 
of  the  systems  as  to  be  trifling  and  insignificant,  and 
that  if  there  has  been  any  restriction  or  suppression  of 
such  insignificant  competition  it  has  been  a  remote, 
indirect,  and  legally  unimportant  result  of  their  present 
relations;  and  that  the  antitrust  act  does  not  prohibit 
such  remote  and  indirect  effects  of  otherwise  lawful 
transactions. 

Before  taking  up  the  facts  in  detail  for  discussion,  my 
argument  perhaps  can  be  better  understood  and  appre- 
ciated if  I  present  briefly  certain  legal  propositions 
which  seem  to  me  to  control.  I  do  not  intend  to  discuss 
questions  of  law  and  the  authorities  extensively,  but 
shall  leave  the  elaboration  of  them  to  my  associate.  In 
United  States  v.  Joint  Traffic  Association  (171  U.  S., 
505)  the  Supreme  Court  declared  that  the  antitrust  act 
applies  only  to  those  contracts  or  combinations  the 
direct  and  immediate  effect  of  which  is  a  restraint 
upon  interstate  commerce  and  that  the  suppression  or 
restriction  prohibited  must  not  be  merely  indirect  or 
incidental.  In  answer  to  the  argument  of  eminent 
counsel  that  the  construction  placed  upon  the  statute 
in  the  Trans-Missouri  Association  case  would  disrupt 
as  unlawful  many  of  the  most  familiar  and  necessary 
business  relations,  the  court  said  (p.  568)  : 

"  The  instances  cited  by  counsel  have  in  our  judgment 
little  or  no  bearing  upon  the  question  under  considera- 


70 

tion.  In  Hopkins  v.  United  States,  decided  at  this 
t«rm  (post,  578),  we  say  that  the  statute  applies  only  to 
those  contracts  whose  clirect  and  immediate  effect  is  a 
restraint  upon  interstate  commerce,  and  that  to  treat 
the  act  as  condemning  all  agreements  under  which,  as 
a  result,  the  cost  of  conducting  an  interstate  commercial 
business  may  be  increased  would  enlarge  the  applica- 
tion of  the  act  far  beyond  the  fair  meaning  of  the  lan- 
guage used.  The  effect  upon  interstate  commerce  must 
not  be  indirect  or  incidental  only.  An  agreement  en- 
tered into  for  the  purpose  of  promoting  the  legitimate 
business  of  an  individual  or  corporation,  with  no  pur- 
pose to  thereby  affect  or  restrain  interstate  commerce, 
and  which  does  not  directly  restrain  such  commerce,  is 
not,  as  we  think,  covered  by  the  act,  although  the  agree- 
ment may  indirectly  and  remotely  affect  that  commerce. 
We  also  repeat  what  is  said  in  the  case  above  cited,  that 
'  the  act  of  Congress  must  have  a  reasonable  construc- 
tion, or  else  there  would  scarcely  be  an  agreement  or 
contract  among  business  men  that  could  not  be  said  to 
have,  indirectly  or  remotely,  some  bearing  upon  inter- 
state commerce  and  possibly  to  restrain  it.'  To  suppose, 
as  is  assumed  by  counsel,  that  the  effect  of  the  decision 
in  the  Trans-Missouri  case  is  to  render  illegal  most 
business  contracts  or  combinations,  however  indispensa- 
ble and  necessary  they  may  be,  because,  as  they  assert, 
they  all  restrain  trade  in  some  remote  and  indirect  de- 
gree, is  to  make  a  most  violent  assumption  and  one  not 
called  for  or  justified  by  the  decision  mentioned  or  by 
any  other  decision  of  this  court." 

And  in  the  Hopkins  case  (171  U.  S.,  578)  the  court, 
in  addition  to  the  language  quoted  above,  also  said 
(p.  594)  : 

"An  agreement  may  in  a  variety  of  ways  affect  inter- 
state commerce,  just  as  State  legislation  may,  and  yet, 
like  it,  be  entirely  valid,  because  the  interference  pro- 
duced by  the  agreement  or  by  the  legislation  is  not 
direct." 

And  in  support  of  this  the  court  cites  many  of  its 
previous  decisions  dealing  with  State  legislation  which 
affected  interstate  commerce,  but  which,  notwithstand- 
ing the  power  of  Congress  over  such  commerce,  were 
held  to  be  valid  because  the  interference  thereby  with 
interstate  commerce  was  merely  incidental  and  was  not 
a  direct  regulation.  Thus,  the  court  puts  contracts 
which  may  indirectly  and  incidentally  restrain  inter- 


71 

state  commerce  upon  the  same  basis  with  respect  to 
validity  as  legislation  of  the  states,  of  which  there  are 
numerous  examples,  which  incidentally  and  indirectly 
affect  interstate  commerce  and  yet  are  valid  because 
such  effect  is  not  a  direct  regulation  of  such  commerce. 

We  come  then  directly  to  the  consideration  of  the  cir- 
cumstances under  which  and  the  purposes  for  which 
the  Union  Pacific  acquired  the  stock  of  the  Southern 
Pacific. 

Now,  we  all  understand  that  if  the  manufacturei's 
or  dealers  in  a  certain  commodity  get  together  and  make 
a  contract  that  the  prices  shall  be  maintained  at  a  cer- 
tain rate,  that  is  a  contract  in  restraint  of  trade.  We 
know  from  the  decisions  of  the  Supreme  Court  that  if 
a  numl)er  of  competing  railroads  get  together  for  the 
ver}^  purpose,  as  found  by  the  courts  in  both  of  these 
cases,  of  restricting  competition,  not  suppressing  it,  per- 
haps, absolutely,  but  restricting  it  and  embarrassing 
it,  that  is  a  "  combination  "  or  "  conspiracy  "  in  re- 
straint of  trade;  but  when  a  corporation  or  firm  or 
individual,  in  the  exercise  of  the  important  right  to  ac- 
quire property,  actually  buys  the  stock  of  a  competing 
corporation,  it  is  not  a  contract  in  restraint  of  trade, 
but  is  an  ,exercise  of  the  right  to  acquire  property,  and 
if  restriction  in  competition  results  it  is  a  mere  inci- 
dental and  indirect  effect  and  result  of  the  exercise  of  a 
lawful  right. 

Commissioner  Clements.  Suppose  the  motive  was  to 
get  rid  of  the  competition;  would  you  say  the  same 
thing? 

Mr.  LovETT.  I  believe  there  would  still  be  the  right. 
I  have  never  considered  that  very  thoroughly,  because 
I  have  not  felt  that  it  was  called  for  by  our  case ;  but 
the  courts  have  certainly  held  that  in  respect  to  indi- 
viduals— how  far  that  would  extend  to  railroad  corpora- 
tions I  do  not  know,  I  am  not  j^repared  to  say  at  the 
moment ;  but  take  the  case  of  competing  tradesmen  and 
manufacturers — each  owns  absolutely  his  own  property. 
They  can  not  get  together  and  fix  prices,  because  that 
would  be  in  restraint  of  trade;  but  the  owner  of  prop- 
erty has,  as  it  seems  to  me,  the  right  to  enjoy  every 


72 

incident  and  legitimate  profit  of  that  ownership.  If  to 
protect  that  property  he  buys  out  the  other  man,  the 
elimination  of  competition  is  the  motive  of  the  pur- 
chaser, yet  it  is  lawful.  The  vendor  may  have  made 
himself  a  nuisance  as  a  competitor.  Did  he  not  have 
the  right  to  do  it?  Has  not  the  owner  of  the  property 
the  right,  as  the  owner  of  that  property,  to  cut  the  price 
and  make  it  to  the  interest  of  his  competitor  to  buy  him- 
out  ? 

I  think  those  questions  follow  inevitably  the  right  to 
own  and  acquire  property;  but  I  have  not  considered 
that  aspect  of  it  thoroughly,  because  I  felt  that  it  was 
not  necessary,  in  view  of  the  facts  of  this  case. 

Commissioner  Clark.  Would  you  carry  that  personal 
and  individual  right  to  its  full  extent,  as  applied  to  a 
public  service  corporation  ? 

Mi*.  LovETT.  The  right  to  own  stock  of  a  corporation  ? 

Commissioner  Clark.  The  right  to  buy  the  compet- 
ing property. 

Mr.  LovETT.  Assuming  that  it  has  power  under  its 
charter,  by  the  law  of  the  State  that  created  it,  to 
buy  it? 

Commissioner  Clark.  And  that  the  suppression  of 
competition  that  might  result  would  be  considered  as 
purely  incidental  and  beyond  the  reach  of  the  law  ? 

Mr.  LovETT.  I  am  inclined  to  that  opinion. 

Commissioner  Lane.  Is  not  that  contrary  to  the 
Addyston  Pipe  case? 

Mr.  Lovett.  Xo  ;  the  Addyston  Pipe  case  involved  an 
agreement  among  certain  manufacturers  to  divide  a 
certain  territory  among  themselves  and  not  compete 
against  each  other. 

Commissioner  Lane.  They  put  it  in  a  common  hold- 
ing, did  they  not  ? 

Mr.  Lovett.  Xo,  sir. 

Mr.  MiLBURN.  Xo ;  it  regulated  production. 

Mr.  Lovett.  It  did  not  involve  the  ownership  of 
property,  as  I  understand.     It  was  a  contract. 

Commissioner  Lane.  Just  simply  a  contract,  was  it? 

Mr.  Lovett.  That  is  my  recollection,  and  that  ac- 
cords with  the  recollection  of  Mr.  Cravath  and  others. 


73 

But  I  am  really  arguing  beyond  the  necessity  of  the 
facts  in  this  case,  because  I  do  contend  that  the  author- 
ities are  conclusive  on  the  proposition  that  where  the 
restriction  in  competition  is  merely  indirect,  incidental, 
and  remote,  it  is  not  within  the  act,  and  the  facts  un- 
questionably bring  our  case  within  that  rule. 

That  is  as  far  as  it  is  necessary  for  me  to  go  now, 
that  such  restriction  of  competition  as  resulted  was  a 
mere  indirect,  incidental,  and  remote  result,  and  a  cir- 
cumstance so  trifling  in  comparison  that  it  is  without 
any  legal  importance,  and  that  there  could  not  have 
been  in  the  minds  of  those  people,  in  making  the  trans- 
action, any  thought  of  suppressing  or  restricting  com- 
petition. 

Now,  to  take  up  the  situation  of  these  lines  I  should 
like  to  call  the  attention  of  the  Commission  to  the  fact 
that  the  system  of  railroads  extending  from  the  Mis- 
souri River,  at  Omaha  and  Kansas  City,  to  the  Pacific 
Ocean,  made  up  of  the  Union  Pacific  and  the  Central 
Pacific  lines,  is  a  single  system ;  and  I  want,  in  that  con- 
nection, to  call  the  attention  of  the  Commission  to  the 
purpose  for  which  those  roads  were  constructed  and  the 
legislation  under  which  they  were  constructed. 

The  lines  of  the  Union  Pacific,  beginning  on  the  Mis- 
souri River  in  the  east  and  ending  at  Ogden,  Utah,  on 
the  west,  and  of  the  Southern  Pacific  continuing  from  a 
connection  with  the  Union  Pacific  at  Ogden  to  San 
Francisco  and  various  points  in  California,  were  built 
under  the  same  act  of  Congress.  Every  share  of  the 
capital  stock  of  the  Central  Pacific  Railway  Company 
is  owned  by  the  Southern  Pacific  Company.  The  lines 
of  Both  the  Central  Pacific  and  the  Union  Pacific  were 
built  under  the  act  of  Congress  approved  July  1,  1862, 
entitled  "An  act  to  aid  in  the  construction  of  a  railroad 
and  telegraph  line  from  the  Missouci  River  to  the 
Pacific  Ocean,"  etc.,  and  the  various  acts  of  Congress 
amending  and  supplementing  such  original  act.  The 
original  act,  as  is  well  known,  incorporated  the  Union 
Pacific  Railroad  Company  and  provided'  for  the  con- 
struction by  it  of  a  railroad  from  the  Missouri  River 
in  Nebraska  and  of  other  railroads  by  other  companies 


74 

from  the  Missouri  River  in  Kansas  westerly  toward  the 
Pacific  Ocean;  and  by  section  9  of  the  act  it  was  pro- 
vided : 

"  The  Central  Pacific  Railroad  Company  of  Cali- 
fornia, a  corporation  existing  under  the  laws  of  the 
State  of  California,  are  herebj^  authorized  to  construct 
the  railroad  and  telegraph  line  from  the  Pacific  coast 
at  or  near  San  Francisco,  or  the  navigable  waters  of 
the  Sacramento  River,  to  the  eastern  boundary  of  Cali- 
fornia upon  the  same  terms  and  conditions  in  all  re- 
spects as  are  contained  in  this  act  for  the  construction 
of  said  railroad  and  telegraph  lines  first  mentioned  " — 

That  is,  the  Union  Pacific  Line-^- 

"  and  to  meet  and  connect  with  the  first-mentioned  rail- 
road and  telegraph  line  " — 

That  is,  the  Union  Pacific — 
"  on  the  eastern  boundary  of  California.'' 

A  further  provision  in  the  same  paragraph  reads  as 
follows : 

"And  in  case  the  said  first-named  company  shall 
complete  their  line  to  the  eastern  boundary  of  Cali- 
fornia before  it  is  completed  across  said  State  by  the 
Central  Pacific  Railroad  Company  of  California  " — 

That  is,  if  the  Union  Pacific  should  get  to  the  Cali- 
fornia border  before  the  Central  Pacific  got  there — 

"  said  first-named  company  (the  Union  Pacific)  is 
hereby  authorized  to  continue  in  constructing  the  same 
through  California,  with  the  consent  of  said  State, 
upon  the  terms  mentioned  in  this  act  until  the  said 
roads  shall  meet  and  the  whole  line  of  said  railroad  and 
telegraph  is  completed.  And  the  Central  Pacific  Rail- 
road Company  of  California,  after  completing  its  road 
across  said  State,  is  authorized  to  continue  the  con- 
struction of  said  railroad  and  telegraph  through  the 
Territories  of  the  United  States  to  the  Missouri  River, 
including  the  branch  roads  specified  in  this  act,  under 
the  same  conditions  as  to  land  grants  and  everything 
else." 

The  act  also  provided,  in  section  12,  that  the  gauge 
should  be  unifonn  and  should  be  fixed  by  the  President 
of  the  United  States. 


75 

Section  16  of  the  act  provided  as  follows : 

"  That  at  any  time  after  the  passage  of  this  act  all 
of  the  railroad  companies  mentioned  herein  and  assent- 
ing hereto,  or  any  two  or  more  of  them,  are  author- 
ized to  form  themselves  into  one  consolidated  company. 
Notice  of  such  consolidation,  in  writing,  shall  be  filed 
at  the  Department  of  the  Interior,"  etc. 

Thus  the  Central  Pacific,  which  owns  the  road  from 
Ogden  to  the  Pacific  Ocean  and  to  various  points  in 
California,  was  authorized  by  the  act  of  July  2,  1862, 
to  consolidate  with  the  Union  Pacific  and  the  Kansas 
Pacific  and  the  Denver  Pacific.  In  the  exercise  of  the 
power  conferred  by  this  section,  the  Kansas  Pacific  and 
the  Union  Pacific  and  the  Denver  Pacific  were  consoli- 
dated. They  were  competing  lines  in  the  sense  that 
they  were  parallel.  There  was  considerable  space  in- 
tervening between  them,  but  no  other  lines  at  that  time, 
and  they  were  fairly  competing,  I  think.  Each  had 
the  power  under  this  act  to  build  across  the  continent 
from  the  Missouri  River  to  the  Pacific  Ocean.  Con- 
gress authorized  them  to  consolidate.  The  Central 
Pacific  was  not  included  in  the  consolidation.  It  was 
owned  by  different  interests.  Probably  they  could  not 
agree  upon  terms  or  probably  there  was  rivalry  between 
the  two  companies  as  to  the  construction  of  their  lines. 
At  all  events,  for  some  reason  I  do  not  understand,  and 
into  which  I  have  never  had  occasion  to  inquire,  they 
did  not  consolidate,  but  that  system  of  railroads  was 
intended  as  a  single  system.  The  Government  granted 
the  land  and  gave  its  aid  in  money  for  the  purpose  of 
establishing  a  single  system  of  railroads  between  the 
Missouri  River  and  the  Pacific  Ocean. 

Section  16  of  the  amendatory  act  of  July  2,  1864,  pro- 
vided : 

"  That  the  several  companies  authorized  to  construct 
the  aforesaid  roads  are  hereby  required  to  operate  and 
use  said  roads  and  telegraph  for  all  purposes  of  com- 
munication, travel,  and  transportation,  so  far  as  the 
public  and  the  Government  are  concerned,  as  one  con- 
tinuous line." 


76 

Section  1  of  the  joint  resolution  of  Congress  ap- 
proved April  10,  1869,  provided : 

"  That  the  common  terminus  of  the  Union  Pacific  and 
the  Central  Pacific  roads  shall  be  at  or  near  Ogden  " — 

They  were  completed  to  that  vicinity  then — 

"  and  the  Union  Pacific  Company  shall  build  and  the 
Central  Pacific  Company  shall  pay  for  and  own  the 
railroad  from  the  terminus  aforesaid  " — 

That  is,  from  Ogden — 

"  to  Promontor}'^  Point,  at  which  point  the  rails  shall 
meet  and  connect,  and  form  one  continuous  line." 

By  the  act  of  June  20,  1874,  section  15,  requiring  it 
to  be  used  as  one  line,  was  amended  by  adding  a  pro- 
vision making  it  a  penal  offense  not  to  use  it  as  one 
continuous  line.     It  provides : 

"  That  any  officer  or  agent  of  the  companies  author- 
ized to  construct  the  aforesaid  roads,  or  any  company 
engaged  in  operating  either  of  said  roads,  who  shall 
refuse  to  operate  and  use  the  road  or  telegraph  under 
his  control,  or  which  he  is  engaged  in  operating,  for 
all  purpose  of  communication,  travel,  and  transporta- 
tion, so  far  as  the  public  and  the  Government  are 
concerned  " — 

Using  the  language  of  the  preceding  paragraph — 

"  as  one  continuous  line,  shall  be  deemed  guilty  of  a 
misdemeanor,"  etc. 

It  is  perfectly  manifest  from  this  legislation  that  this 
was  designed  by  Congress  as  a  single  system  of  railroad 
although  constructed  by  a  number  of  separate  corpora' 
tions,  if  they  preferred  to  do  it^that.  way.  Congress 
was  utilizing  all  of  the  agencies  then  available  to  build 
this  system  of  railroads.  If  instead  of  working  separ- 
ately they  had  preferred  to  work  as  one,  they  were  given 
the  right  to  consolidate,  but  whether  consolidated  or  not 
they  were  required  by  this  act,  under  a  penal  provision, 
to  use  it  as  one  continuous  line.  Thai  is  the  conspicu- 
ous purpose  and  feature  of  this  legislation  all  the  way 
through. 

Now,  as  I  have  said,  the  Central  Pacific  and  the 
Union  Pacific  were  never  consolidated.  They  both  had 
other  difficulties  with  the  Government  in  meeting  their 


77 

indebtedness.  The  Central  Pacific's  indebtedness,  I 
think,  matured  along  in  1896,  1897,  or  1898,  or  there- 
abouts, most  of  it.  The  Southern  Pacific,  I  think,  had 
secured  control  of  it  prior  to  that  time,  or  certainly  the 
individuals  who  held  a  majorfty  of  the  stock  of  the 
Southern  Pacific  controlled  it.  The  Union  Pacific  had 
gone  into  bankruptcy,  and  in  1897  emerged  from  its 
receivership  with  its  present  organization.  The  Cen- 
tral Pacific  was  then  engaged  in  an  effort  to  settle  its 
indebtedness  to  the  Government,  which  finally  resulted 
in  an  agreement  of  February  1,  1899,  by  which  it  under- 
took to  pay  its  indebtedness  and  secured  it  by  a  deposit 
of  bonds,  etc. 

That  was  February  1,  1899,  that  the  agreement  be- 
tween the  Central  Pacific  and  the  Government  for  the 
settlement  of  its  indebtedness  was  made.  The  read- 
justment of  the  indebtedness  of  that  company,  the  issu- 
ance of  the  new  securities,  the  taking  up  of  the  old  and 
the  launching  of  the  company  anew  occurred  in  August, 
1899,  soon  after  the  agreement  with  the  Government 
was  made.  That  debt  was  paid  by  the  Central  Pacific 
because  the  Southern  Pacific  was  behind  it.  It  was  the 
principal  agency  in  effecting  the  settlement  of  the  debt 
to  the  Government.  As  a  part  of  the  i*eadjustment  plan 
the  Southern  Pacific  Company  acquired  every  share  of 
the  stock  of  the  Central  Pacific,  and  it  deposited  every 
share  of  that  stock  under  the  mortgage  to  the  Union 
Trust  Company,  which  I  introduced  in  evidence  this 
forenoon,  to  secure  an  issue  of  bonds  that  mature  in 
1949.  That  welded  the  Southern  Pacific  and  the  Cen- 
tral Pacific  together. 

Such  was  the  situation  existing  when,  in  1900,  nego- 
tiations were  commenced  by  Mr.  Harriman  and  his  asso- 
ciates controlling  the  Union  Pacific,  with  the  late  C.  P. 
Huntington,  who  with  his  associates  controlled  the 
Southern  Pacific,  for  the  union  of  ownership  of  this 
''  continuous  line."  Huntington  died  in  August,  1900, 
but  negotiations  were  takeir  up  with  his  legatees  and 
others,  which  resulted  in  the  purchase  in  February, 
1901,  of  $75,000,000  par  value  out  of  a  total  of  approxi- 
mately $195,000,000  of  the  capital  stock  of  the  Southern 


78 

Pacific  Company,  to  which  by  purchase  the  following 
year,  I  believe,  there  was  added  $15,000,000  more,  bring- 
ing the  ownership  by  the  Union  Pacific  to  $90,000,000 
out  of  approximately  $195,000,000.  There  was  no  other 
way  by  which  the  unification  of  ownership  of  this  single 
system  of  railroads  from  the  Missouri  River  to  the 
Pacific  Ocean  could  be  effected.  The  Southern  Pacific 
had  neither  the  means  nor  the  credit  to  buy  the  Union 
Pacific.  It  was  a  holding  company,  with  practically  all 
its  assets  placed  for  their  full  value.  ,  The  Union  Pacific 
could  not  buy  the  Central  Pacific.  The  latter  was  not 
upon  the  market.  It  was  vital  to  the  Southern  Pacific. 
As  already  indicated,  every  share  of  its  stock  was  owned 
by  the  Southern  Pacific,  and  had  been  pledged  by  the 
latter  with  the  Union  Trust  Company  of  New  York  as 
collateral  to  secure,  and  as  the  only  security  for  an  issue 
of  36,000,000  of  its  4  per  cent  bonds  not  maturing  until 
1949. 

Obviously,  therefore,  the  only  w^ay  the  Union  Pacific 
Railroad  Company  could  acquire  control  of  that  portion 
of  the  system  extending  westerly  from  Ogden  was  to 
purchase  the  stock  of  the  Southern  Pacific  Company, 
which  owned  all  the  stock  of  the  Central  Pacific  Rail- 
road Company  and  controlled  it. 

The  Southern  Pacific  Railroad  lines  begin  on  the 
Mississippi  River  at  New  Orleans  and  stretch  away 
westwardly  ithrou^h  Louisiana,  Texas,  skirting  the 
Mexican  border,  through  New  Mexico  and  Arizona  to 
Los  Angeles,  and  thence  northerly  through  California 
and  Oregon  to  Portland,  with  the  Central  Pacific  lines 
extending  eastwardly  from  San  Francisco  to  Ogden, 
Utah.  The  Union  Pacific  lines  begin  on  the  Missouri 
River  at  Omaha  and  Kansas  City  and  extend  west- 
wardly through  Kansas,  Nebraska,  Colorado,  Wyo- 
ming, and  Utah  to  Ogden,  with  the  Oregon  Short  Line 
running  from  Salt  Lake  City  northerly  through  Idaho 
and  into  Montana  and  connecting  with  the  lines  of  the 
Oregon  Railroad  &  Navigation  Company,  extending 
to  Portland,  Neither  system  owns  a  mile  of  railroad 
east  of  the  Missouri  and  Mississippi  rivers.  Neither 
penetrates  that  vast  region  lying  between  those  rivers 


79 

and  the  Atlantic  Ocean.  Between  their  lines  where 
geographically  parallel  lie  most  of  the  States  of  Lou- 
isiana, Texas,  Kansas,  Colorado,  the  Territories  of  Ari- 
zona and  New  Mexico,  and  all  of  Oklahoma,  Arkansas, 
Mississippi,  Tennessee,  Kentucky,  Missouri,  Illinois,  and 
Iowa.  The  Southern  Pacific  operates  a  line  of  steam- 
ers from  New  York  to  New  Orleans  and  Galveston, 
where  they  interchange  freight  with  the  rail  lines ;  and 
through  this  agency  the  Southern  Pacific  Company  was 
largely  engaged  in  transcontinental  traffic  from  the  At- 
lantic seaboard,  the  Gulf  States,  and  the  Pacific  coast. 
All  of  this  traffic  westbound  which  the  Union  Pacific 
formerly  got  or  now  gets  is  carried  to  it  by  the  power- 
ful trunk  lines  extending  from  the  seaboard  to  Chicago, 
and  thence  via  the  lines  of  almost  equal  power  from 
Chicago  to  the  Missouri  River.  All  this  traffic  which 
the  Union  Pacific  gets  eastbound  is  delivered  to  it  by 
the  Southern  Pacific  at  Ogden,  except  possibly  an  un- 
known, because  insignificant,  amount  originating  at 
Portland,  Oreg. 

The  Union  Pacific  is  merely  an  intermediate  carrier — 
a  link  of  1,000  miles  in  a  transcontinental  line  of  more 
than  3,000 — and  is  obviously  without  any  rate-making 
power.  It  is  absolutely  dependent  upon  the  lines  east 
of  the  Missouri  River  for  all  the  westbound  traffic  it 
gets,  and  it  is  likewise  dependent  upon  the  Southern 
Pacific  for  all  the  westbound  traffic  from  the  Pacific 
coast  which  it  gets.  It  was  and  is  utterly  powerless 
in  the  making  of  any  transcontinental  rate.  It  could 
not  openly  cut  a  rate  if- it  would.  If  it  should  under- 
take to  make  a  rate  unsatisfactory  to  lines  east  of  the 
Missouri  River,  they  could  refuse  to  recognize  it  and 
could  turn  their  business  to  its  rivals.  The  Atchison 
owns  an  unbroken  line  from  Chicago  to  the  Pacific 
Ocean,  touching  most  of  the  principal  points  in  Cali- 
fornia. Extending  from  Chicago  to  a  connection  with 
the  Denver  &  Rio  Grande  system  at  Denver  or  Pueblo 
are  the  Burlington,  the  Rock  Island,  the  Atchison,  and 
from  the  Missouri  River  the  Missouri  Pacific.  All 
these  lines  west  of  the  Missouri  River  are  fiercely  com- 
petitive with  the  Union  Pacific.  In  connection  with 
3568—07  M 6 


80 

the  Denver  &  Rio  Grande  they  reach  Salt  Lake  City 
and  Ogden,  where  there  is  connection  with  the  Southern 
Pacific.  Thus  the  trunk  lines  from  the  Atlantic  to 
Chicago  and  the  Missouri  River  were  not  dependent 
upon  the  Union  Pacific. 

Then,  the  Southern  Pacific  had  the  other  end  of  the 
line — that  is,  between  Ogden  and  the  Pacific  Ocean. 
The  Union  Pacific  of  course  could  make  no  rate  west 
of  Ogden  without  the  consent  of  the  Southern  Pacific. 
It  was  at  the  mercy  of  the  Southern  Pacific.  "The  latter 
could  divert  its  unrouted  traffic  to  the  Denver  &  Rio 
Grande  at  Ogden  and  its  eastern  connections.  It  is 
impossible  to  suppose  that  thus  holding  the  key  the 
Southern  Pacific  would  allow  the  Union  Pacific  to 
make  any  rate  to  California  not  acceptable  to  it. 

In  this  situation  can  there  be  any  doubt  about  the  ob- 
ject or  purpose  of  the  Union  Pacific  in  purchasing  stock 
of  the  Southern  Pacific?  Is  it  not  absurd  to  suppose 
that  it  was  prompted  by  the  purpose  to  eliminate  the 
competition  for  seaboard  business  presented  by  the 
Southern  Pacific  boat  line  operating  around  the  coast 
from  New  York  to  New  Orleans,  1,400  miles  away  from 
the  eastern  terminus  of  the  Union  Pacific  line  ?  Would 
it  not  be  singular  for  it  to  undertake,  singlehanded  and 
alone,  such  a  vast  transaction  for  the  benefit  of  the 
powerful  trunk  lines  extending  from  the  seaboard  to 
Chicago  and  the  Missouri  River,  who  were  face  to  face 
with  the  competition  of  the  Southern  Pacific  and  the 
chief  sufferers  thereby?  I  submit  as  a  proposition  too 
plain  to  admit  of  serious  dispute  that  any  purpose  to 
restrain  competition  could  not  reasonably  have  been  a 
factor  in  the  transaction.  The  whole  purpose  and  ob- 
ject obviously  was  to  get  an  outlet  from  Ogden,  its  west- 
ern terminus,  to  the  Pacific  Ocean  in  California.  As 
we  have  seen,  it  was  at  the  mercy  of  the  Southern  Paci- 
fic. It  could  not  reach  California,  except  at  rates  dic- 
tated by  the  Southern  Pacific.  It  could  get  only  such 
share  of  the  unrouted  business  from  California  and  the 
Orient  as  the  Southern  Pacific  saw  proper  to  give  it; 
the  latter  could  distribute  such  business  as  it  pleased  at 
Ogden  between  the  Union  Pacific  and  the  Denver  &  Rio 


81 

Grande.  The  Southern  Pacific  was  unplaced  finan- 
cially and  after  the  death  of  C.  P.  Huntington,  in 
August,  1900,  was  known  to  be  upon  the  market.  Sup- 
pose the  interests  controlling  the  Burlington  or  the 
Rock  Island  or  the  Missouri  Pacific  in  connection  with 
the  Denver  &  Rio  Grande  had  acquired  control  of  the 
Southern  Pacific.  "What  would  have  been  the  position 
of  the  Union  Pacific  and  where  would  it  be  to-day  ?  It 
would  have  been  precisely  where  the  Denver  &  Rio 
Grande  finds  itself — in  a  position  where  it  is  forced  to 
build  from  Salt  Lake  across  the  Sierra  Nevada  ranges  to 
the  Pacific  Ocean,  and  when  it  gets  there  it  is  still  with- 
out tracks  into  all  the  industrial  and  shipping  interests 
which  have  been  built  up  along  the  tracks  of  the  South- 
ern Pacific  in  the  thriving  cities  of  California,  whence 
comes  such  a  rich  and  valuable  traffic  for  the  connection 
at  Ogden  favored  by  the  Southern  Pacific.  It  was  to 
become  the  preferred  connection  of  the  Southern  Pacific, 
thereby  getting  the  unrouted  traffic  of  the  latter  and  to 
protect  itself  against  the  danger  of  the  Southern  Pacific 
falling  into  rival  hands  that  the  Union  Pacific  purchased 
the  stock  of  the  Southern  Pacific.  If  the  men  who  con- 
trolled the  Union  Pacific  in  the  transaction  were  sane 
men,  these  were  the  considerations  which  it  seems  to  me 
must  be  attributed  to  them,  and  that  any  purpose  to 
restrict  competition,  insignificant  as  it  must  have  been, 
could  not  have  entered  into  the  transaction  at  all. 

But  it  may  be  said  that  the  Southern  Pacific  also 
had  a  line  from  California  to  New  York  by  way  of  the 
Sunset  route  and  the  rail  line,  and  that  that  was  en- 
gaged in  competition  with  the  all-rail  lines.  That  is 
granted.  The  Southern  Pacific  had  a  position  that 
was  peculiarly  valuable  to  it.  It  had  the  Sunset  route, 
but  it  also  had  a  transcontinental  line,  or  a  share  in  a 
transcontinental  line,  almost  as  great  as  the  Union 
Pacific's  line  in  length  and  a  great  deal  more  important 
in  its  strategic  position  because  it  had  the  choice  of 
connections  at  Ogden.  It  could  turn  its  traffic  either 
way,  to  the  Denver  &  Rio  Grande  or  to  the  Union 
Pacific.     It   was  not  dependent  upon  either,  and   in 


82 

addition  to  that  it  had  the  Sunset  route.  The  fact,  if 
the  Commission  please,  that  is  absohitely  controlling  in 
the  consideration  of  this  question,  and  a  fact  which,  for- 
tunately, is  a  physical  fact  that  can  not  be  ignored,  is 
that  the  Southern  Pacific  owned  the  other  end  of  this 
transcontinental  line.  It  owned  the  line  from  Ogden 
to  the  Pacific  coast,  and  no  railroad  company  entering 
California,  except  the  Atchison,  could  make  a  rate  to 
California  without  the  consent  of  the  Southern  Pacific. 
It  held  the  key  to  the  situation.  The  Union  Pacific 
could  not  cut  the  rate  without  the  consent  of  the  South- 
ern Pacific.  The  Southern  Pacific  of  course  would  not 
allow  a  rate  that  would  be  detrimental  to  its  Sunset  line 
unless  it  was  forced  by  the  Atchison,  wdiich  was  in  a 
position  to  make  rates. 

Now,  I  take  it  that  before  there  can  be  any  restric- 
tion of  competition  there  must  be  competition.  Com- 
petition must  exist  before  it  can  be  restricted  or  there 
must  be  the  possibility  of  competition.  The  situation 
must  admit  of  competition,  as,  for  instance,  in  the 
Northern  Securities  case.  But  competition  was  impos- 
sible in  this  situation  because  the  Union  Pacific  was  not 
a  parallel  line  to  the  Southern  Pacific,  but  a  connecting 
line. 

It  seems  to  me  that  phj^sical  fact,  that  the  Southern 
Pacific  owned  the  line  from  Ogden  to  the  Pacific,  is  de- 
cisive of  this  question.  It  can  not  be  avoided.  It  is 
there,  and  the  Union  Pacific  could  not  compete  with 
it  because  it  was  a  connecting  line,  and  it  could  not 
com.pete  with  this  Sunset  line  of  the  Southern  Pacific 
except  in  so  far  as  the  Southern  Pacific  was  willing  for 
it  to  compete.  ^ATiy  should  it  be  willing  for  it  to  com- 
pete ?  Of  course  the  Southern  Pacific  knew  that  there 
was  a  vast  amount  of  this  transcontinental  traffic  that 
would  go  all  rail  and  that  if  the  Union  Pacific  did  not 
take  it  the  Atchison  would.  It  had  850  miles  of  road 
from  Ogden  to  the  Pacific  that  it  wanted  to  use.  It  was 
a  carrier  by  the  rail  route  as  well  as  the  sea  route.  If  it 
did  not  utilize  its  eastern  connections  to  participate  in 
this  all-rail  traffic  across  the  continent,  of  course  it 
would  go  to  the  Atchison.     Therefore,  occupying  this 


83 

dual  position,  it  joined  its  other  rail  connections  in  mak- 
ing the  transcontinental  rates,  because  it  had  850  miles 
of  road  good  only  for  that  purpose  and  because  it  had 
to  compete  with  the  Atchison.  Whatever  business  it 
could  get  that  sWay  it  would  readily  take,  because  if  it 
did  not  it  would  go  to  the  Atchison.  It  left  its  eastern 
connections  free,  except  that  it  would  not  allow  that  line 
to  cut  a  rate  against  its  Sunset  line.  In  meeting  the 
competition  of  the  Atchison  of  course  it  would  have  to 
yield,  because  that  was  a  competing  line. 

I  am  consuming  more  time  than  I  had  intended. 

Mr.  Kellogg.  May  I  ask  a  question  ? 

Mr.  LovETT.  Oh,  j^es. 

Mr.  Kellogg.  Do  you  consider  the  Burlington  road 
and  the  Union  Pacific  as  competing  lines  ? 

Mr.  LovETT.  I  think  they  are,  probably,  with  respect 
to  some  local  business.  I  am  not  as  familiar  with  the 
Burlington  line  as  I  ought  to  be.  I  only  have  a  very 
general  knowledge  of  its  situation. 

But  it  is  contended  that  the  Union  Pacific  system 
was  in  a  position  to  compete  with  the  Southern  Pacific 
for  California  business  by  its  rail  lines  from  the  Mis- 
souri River  to  Granger  or  Ogden,  and  then  over  the 
Oregon  Short  Line  to  Huntington,  and  thence  over  the 
rails  of  the  Oregon  Railroad  &  Navigation  Company  to 
Portland,  and  thence  by  the  boats  of  the  last-named  com- 
pany between  Portland  and  San  Francisco.  But  every 
witness  who  has  testified  has  declared  that  route  utterly 
impracticable  as  a  competitor  for  transcontinental  busi- 
ness. After  carrying  business  from  Granger  or  Ogden 
to  Portland,  a  haul  of  upward  of  800  miles  over  a 
range  of  mountains,  it  is  no  nearer  San  Francisco  than 
when  it  left  Ogden;  and  the  boats  from  Portland  to 
San  Francisco  had  no  connections  to  get  their  business 
to  or  from  the  interior  except  the  Southern  Pacific, 
which,  with  respect  to  competitive  business,  would  be 
a  rival.  Thus  the  boats  would  be  confined  strictly  to 
San  Francisco,  and  as  between  the  short  direct  rail 
line  of  the  Central  Pacific  to  Ogden  and  the  circuitous 
rail  and  boat  line  from  Ogden  to  Portland  and  thence 
by  sea  to  San  Francisco,  there  is  no  difficulty  in  decid- 


84 

ing  which  route  the  traffic  even  of  San  Francisco  proper 
would  take. 

Moreover,  would  not  the  Union  Pacific  have  killed 
the  goose  that  laid  the  golden  egg  if  it  had  attempted 
to  work  the  rail  and  water  route  via  Portland  against 
its  direct  connection,  the  Central  Pacific  line,  between 
Ogden  and  San  Francisco.  At  equal  rates  all  the  traf- 
fic would  undoubtedly  move  by  the  short  all-rail  route. 
A  reduced  open  rate  would  have  been  met  of  course  by 
the  Southern  Pacific  and  the  loss  sustained  by  the 
Union  Pacific  as  its  share  of  the  reduced  rates  would 
have  exceeded,  on  account  of  the  vastly  greater  volume 
of  traffic  moving  that  way,  many  thousandfold  the 
profit  on  the  business  moving  via  Portland.  But 
beyond  all  this  is  the  practical  fact  that  if  the  Union 
Pacific  had  attempted  to  work  the  Portland  route 
against  the  Southern  Pacific,  the  latter  undoubtedly 
would  have  retaliated  by  turning  its  business  to  the 
Denver  &  Eio  Grande,  and  the  Union  Pacific  would 
have  been  practically  out  of  the  transcontinental 
business. 

The  best  evidence  of  it,  however,  is  that  the  testimony 
shows  that  long  before  the  Union  Pacific  bought  the 
Southern  Pacific's  stock  the  Union  Pacific  had  the  op- 
portunity to  use  this  line  and  it  never  used  it. 

My  friend.  Mr.  Severance,  asked  a  witness  if  that 
was  not  a  club  of  some  value  to  the  Union  Pacific  to 
use  against  the  Southern  Pacific  in  exacting  divisions 
of  the  through  rate. 

The  witness  disposed  of  that  by  saying  that  if  the 
Union  Pacific  attempted  to  divert  freight  around  by 
way  of  Portland,  the  Southern  Pacific  would  of  course 
retaliate  by  turning  its  business  at  Ogden  over  to  the 
Denver  «S;  Rio  Grande,  and  that  the  Union  Pacific 
would  get  very  much  the  worst  of  the  contest ;  and  it  is 
perfectly  obvious,  it  is  perfectly  plain  it  would  be  sui- 
cidal to  the  Union  Pacific  to  attempt  to  use  that  route  as 
against  the  Southern  Pacific.  I  do  not  care  what  its 
motive  is,  the  matter  of  divisions,  or  anything  else.  I 
shall  not  detain  the  Commission  longer  in  discussing 
that,  because  I  think  that  is  disposed  of. 


85 

Commissioner  Clements.  What  would  be  the  motive 
of  the  Union  Pacific  in  buying  into  the  Atchison? 
That  is  a  competing  road? 

Mr.  LovETT.  It  would  be  as  an  investment,  I  take  it, 
Mr.  Commissioner.    That  was  the  motive. 

Commissioner  Clements.  They  bought  into  it  suffi- 
ciently to  have  two  directors  in  the  management  of  it. 

Mr.  LovETT.  I  do  not  so  understand,  Mr.  Commis- 
sioner. 

Commissioner  Clements.  That  was  Mr.  Ripley's 
testimony. 

Mr.  Lo\'ETT.  I  think  not.  Mr.  Ripley  stated  that  cer- 
tain gentlemen  who  owned,  according  to  his  under- 
standing, about  300,000  shares  would  have  been  entitled 
to  two  directors,  and  that  they  were  accorded.  The 
Union  Pacific  owns  100,000  shares. 

Commissioner  Clements.  Those  gentlemen  are  con- 
nected with  the  management  of  the  Union  Pacific  ? 

Mr.  LovETT.  Those  that  he  named  are.  They  are  di- 
rectors, but  so  far  as  such  ownership  of  stock  is  con- 
cerned it  was  entirely  an  individual  matter. 

Commissioner  Lane.  Mr.  Harriman,  according  to 
Mr.  Ripley,  went  to  Mr.  Ripley  and  asked  for  those 
directors.    Was  not  that  it? 

Mr.  LovETT.  Yes. 

Commissioner  Lane.  Mr.  Harriman  asked  for  an  offi- 
cial of  the  Union  Pacific  to  be  made  a  director,  and  Mr. 
Ripley  refused  and  said  he  would  not  consent  to  that, 
but  would  put  in  Mr.  Frick  and  Mr.  Rogers. 

Mr.  LovETT.  Yes,  sir.  Mr.  Ripley's  testimony,  as  I 
recall  it,  substantially  was  to  the  effect  that  Mr.  Harri- 
man told  him  that  he  and  some  of  his  friends  had  ac- 
quired a  block  of  Santa  Fe  stock  because  they  thought  it 
was  a  good  investment,  and  they  would  like  representa- 
tion on  the  board  of  directors.  Mr.  Ripley  said  that 
from  such  information  as  he  gathered  he  made  up  his 
mind  that  they  had  between  250,000  and  300,000  shares 
of  stock,  and  after  discussing  it  with  Mr.  Morowitz  and 
his  associates  they  finally  agreed  to  allow  them  two 
directors,  because  they  could  get  that  under  the  cumu- 
lative system  of  voting  allowed  under  the  laws  of  Kan- 


86 

sas,  where  the  Atchison  is  incorporated;  but  Mr.  Rip- 
ley's testimony  was  that  they  agreed  upon  the  condition 
that  they  should  not  be  officers  of  the  Union  Pacific  or 
Southern  Pacific. 

Commissioner  Clements.  If  the  acquisition  of  that 
stock  should  go  on  ulitil  it  was  practically  sufficient  for 
the  Union  Pacific  to  control  the  Atchison,  what  differ- 
ence would  it  make  to  the  public  what  the  motive  was, 
whether  it  was  an  investment  or  whether  it  was  to  get 
rid  of  competition,  if,  in  fact,  it  did  get  rid  of  compe- 
tition ? 

Mr.  LovETT.  That,  of  course,  will  be  a  very  inter- 
esting question,  Mr.  Commissioner,  if  it  ever  arises. 
I  think  we  are  far  from  it  now. 

Commissioner  Clements.  Mr.  Harriman  said  in 
New  York  that  it  would  not  take  long  to  do  it  if  the 
laws  would  allow  him,  or  something  of  that  sort;  or 
perhaps  he  was  just  talking. 

Mr.  TtOYETT.  I  think  he  readily  conceded,  -however, 
that  the  law  would  not  allow  that. 

Mr.  Severance.  You  claim  to-day  that  the  law  does 
allow  it? 

Mr.  Lo^TETT.  Yes. 

Mr.  Severance.  So  you  do  not  agree  with  Mr.  Har- 
riman ? 

Mr.  LovETT.  I  think  that  is  a  fairly  open  question. 
Many  people  may  not  agree  with  Mr-  Harriman  as  to 
legal  questions;  but  we  would  then  have  the  question 
whether  a  bona  fide  purchase  or  investment  of  one  cor- 
poration in  the  stock  of  a  corporation  owning  a  com- 
peting line  is  contrary  to  the  anti-trust  act.  But  we 
have  no  such  question  now,  and  I  think  under  the  law 
as  it  stands  it  would  not  be  a  violation  of  the  act.  But 
I  am  not  insistent  upon  that  opinion,  because  I  do  not 
consider  it  material  so  far  as  this  controversy  is  con- 
cerned. 

Commissioner  Clark.  If  you  carry  it  to  its  logical 
conclusion,  would  it  not  mean  this,  that  any  syndicate 
of  men  with  sufficient  money  to  carry  the  margins  over 
and  above  the  money  they  could  borrow  on  the  securi- 
ties, so  that  they  controlled  the  several  corporations, 


87 

could  continue  until  they  owned  every  railroad  in  the 
United  States? 

Mr.  Mn.BURN.  Or  owned  all  the  real  estate  of  the 
country  ? 

Mr.  LovETT.  I  think  if  any  man  has  money  enough 
to  own  all  the  railroads,  he  has  the  right  under  the 
American  Constitution  to  own  them  all.  I  do  not  know 
of  any  law  that  would  prevent  him,  if  he  has  the  money 
to  do  it. 

Commissioner  Clark.  In  reply  to  Mr.  Milburn's  sug- 
gestion, to  my  mind  tiiere  is  a  distinct  difference  be- 
tween the  real  estate  of  the  country  and  the  transporta- 
tion facilities  of  the  country. 

Mr.  MiLBURN.  What  I  meant  was,  you  can  undertake 
to  buy  anything  that  is  purchasable. 

Mr.  LovETT.  That,  of  course,  invoh^es  a  rather  inter- 
esting proposition,  that  we  all  may  have  various  views 
upon,  whether  it  is  better  for  the  Government  to  own 
the  railroads,  or  whether  it  is  better,  as  my  old  friend 
Judge  ReagSn,  of  the  Texas  Railroad  Commission, 
believed  it  was  better,  merely  to  fix  the  rates.  He  said 
he  was  opposed  to  Government  ownership  of  railroads, 
because  "  It  is  very  much  better  for  the  people  to  let 
the  individuals  own  them,  and  then  we  will  fix  the 
rates;  "  and  I  am  not  sure  from  the  public  standpoint 
but  that  is  the  best.  But  that  is  a  question,  as  I  say, 
that  is  beyond  the  scope  of  my  argimient  to-day,  as  I 
am  not  dealing  with  what  the  laws  should  be,  but  what 
may  be  done  under  the  laws  as  they  are  to-day. 

Commissioner  Lane.  Your  argument  regarding  the 
Union  Pacific  and  the  Central  Pacific  from  Omaha  to 
San  Francisco  is  somewhat  analogous  to  this,  is  it  not? 
The  Baltimore  and  Ohio  and  the  Pennsylvania  start 
out  of  Chicago.  The  Pennsylvania  stops  at  Philadel- 
phia. Assuming  that  the  Pennsylvania  wanted  to  reach 
tide  water  at  Baltimore  it  would  have  the  right  to  buy 
the  Baltimore  and  Ohio  road,  because  it  could  not  get 
down  to  Baltimore  without  buying  the  Baltimore  and 
Ohio  road,  and  that  would  also  give  it  the  right  then 
to  go  around  from  Baltimore  back  to  Chicago  and  own 
that  parallel  competing  line. 


88 

Mr.  LovETT.  No,  sir;  I  do  not  think  that  is  analogous 
at  all.  That  is  a  different  situation.  Those  roads  are 
competing.  They  serve  the  same  territory,  as  I  under- 
stand. 

Commissioner  Lane.  They  reach  out  for  the  same 
traffic  in  the  West,  do  they  not  ? 

Mr.  LoA"ETT.  West  of  Chicago  ? 

Commissioner  Lane.  Yes. 

]Mr.  LovETT.  I  presume  they  do. 

Commissioner  Lane.  And  for  a  great  deal  of  terri- 
tory in  between  Chicago  and  Pittsburg? 

Mr.  LovETT.  Yes. 

Commissioner  Lane.  Would  it  be  an  illustration 
then,  closer,  if  the  Pennsylvania  owned  the  road  not 
only  up  to  New  York,  but  back  of  New  York  up  to 
Buffalo,  and  the  Lake  Shore,  which  was  an  independent 
line,  we  will  assume,  wished  to  reach  New  York.  Would 
it  then  be  justified  in  buying  the  line  from  Buffalo  to 
New  York  and  back  to  Chicago  by  way  of  Pittsburg? 

Mr.  Lovett.  In  all  of  those  cases  I  take  it  that  the 
restriction  of  competition  would  be  the  overshadowing 
effect  of  the  transaction.  In  this  case,  if  any  competi- 
tion is  restricted,  it  is  insignificant.  I  do  not  concede 
for  a  moment  that  this  traffic,  originating  on  the  sea- 
board territory  or  anywhere  east  of  the  Missouri  River, 
or  along  the  .line  of  the  Union  Pacific,  is  in  compe- 
tition between  the  Union  Pacific  and  the  Southern 
Pacific  or  ever  was.  It  absolutely  never  was.  It  is 
in  competition  with  the.  Atchison  and  the  lines  east 
of  Chicago  and  the  Southern  Pacific,  but  it  never  was 
in  competition  between  the  Unibn  Pacific  and  the 
Southern  Pacific.  Now,  the  traffic  in  the  seaboard  ter- 
ritory, that  is,  east  of  Pittsburg  and  Buffalo,  and  in 
New  England,  I  readily  concede  has  been  and  is  to- 
day in  competition  between  the  Sunset  route  of  the 
Southern  Pacific  and  the  all-rail  lines.  When  I  say 
all-rail  lines  I  do  not  mean  simpW  the  Union  Pacific, 
but  the  system  of  lines  that  pick  up  the  traffic  here 
at  the  Atlantic  seaboard-  and  take  it  to  Chicago  or  the 
Missouri  River.     Thev  will  take  it  to  California  re- 


89 

gardless  of  the  Union  Pacific  or  Southern  Pacific,  be- 
cause they  can  take  it  over  the  Atchison.  The  South- 
ern Pacific  recognized  that  the  Union  Pacific  was  a 
participating  line  in  that  traffic  and  joined  with  the 
Union  Pacific  in  competing  for  it,  but  there  never  was 
any  competition  betwen  the  Union  Pacific  and  the 
Southern  Pacific  for  the  traffic. 

In  the  case  you  take,  Mr.  Commissioner,  of  the  Penn- 
sylvania wanting  to  get  to  the  seaboard  and  buying 
the  Baltimore  &  Ohio,  I  am  dealing  with  practical 
issues,  and  I  submit  that  is  scarcely  a  parallel  case, 
because  it  is  obvious  that  two  vast  railroad  systems 
competing  with  each  other  would  be  put  together  on 
the  pretext  of  getting  a  line  40  or  50  miles  in  length  to 
tidewater.  The  suppression  of  competition  would 
overshadow  the  real  purchase — entirely  overshadow-  it. 

That  is  not  true  here.  I  dissent  entirely  from  the 
proposition  that  any  of  this  traffic  east  of  the  Mis- 
souri River  or  that  originating  on  the  Union  Pacific 
ever  was  in  competition  between  the  Southern  Pacific 
and  the  Union  Pacific.  Absolutely,  the  physical  facts 
forbid  it.  It  is  physically  impossible  for  that  traffic 
ever  to  have  been  in  competition  between  those  two 
systems.  The  competition  was  between  the  Atchison 
connecting  with  the  lines  east  and  the  Southern  Pacific. 
They  could  make  the  rates  and  they  could  do  it  with- 
.  out  reference  either  to  the  Southern  Pacific  or  the 
Union  Pacific;  and  the  Southern  Pacific,  owning  850 
miles  of  this  transcontinental  line,  joined  the  Union 
Pacific,  owning  1,000  miles,  in  participating  in  the 
business,  not  as  competitors,  but  as  connecting  lines. 

.Commissioner  Lane.  Take  it  at  the  other  end.  Take 
it  at  the  San  Francisco  or  the  Pacific  coast  end,  where 
the  Sunset  Route  and  the  Central  come  together,  or  at 
Portland,  where  the  Shasta  and  the  O.  R.  &  N.  come 
together,  or  at  Los  Angeles,  where  the  Southern  and 
the  branch  of  the  Union  running  down  south,  come 
together.     There  is  competition  there,  is  there  not  ? 

Mr.  LovETT.  Between  the  Southern  Pacific  and  the 
Union  Pacific  ? 


90 

Commissioner  Lane.  Yes;  there  is  competition  be- 
tween the  Southern  Pacific  and  the  Union  Pacific  as  to 
how  that  business  will  get  east,  is  there  not? 

Mr.  LovETT.  Their  lines  operate  there.  Some  of  that 
traffic  moA'es  over  channels.  Take  business  from  San 
Francisco:  Business  originating  in  San  Francisco  and 
destined  for  the  Atlantic  seaboard  may  go  by  the 
Atchison  or  by  the  Union  Pacific-Southern  Pacific 
lines,  and  it  may  go  either  way  that  the  shipper  sends 
it;  but  the  Southern  Pacific  owns  850  miles  of  the  all- 
rail  line,  and  its  consent  is  absolutely  indispensable  to 
any  rate  made  by  the  Union  Pacific,  because  the  Union 
Pacific  is  without  rate-making  power  in  that  situation. 
The  Southern  Pacific  owns  850  miles  of  this  road — the 
western  end.  Suppose  instead  of  the  Union  Pacific 
buying  the  Southern  Pacific  the  Southern  Pacific  had 
bought  the  Union  Pacific;  it  would  simply  have  been 
extending  its  line  from  Ogden  to  the  Missouri  River. 
That  would  have  been  the  result.  There  would  have 
been  no  suppression  of  competition  in  it.  It  would 
have  been  merely  extending  its  line  by  purchase  to  the 
Missouri  River. 

Now,  the  Atchison  is  a  factor  in  this  transcontinental 
situation.  With  its  connections  east  of  Chicago  it 
makes  the  rates,  and  a  great  deal  of  the  traffic  goes  all 
rail.  The  Union  Pacific  and  the  Southern  Pacific  meet 
that  competition  with  their  joint  line,  but  they  could - 
not  compete  with  each  other  there. 

Commissioner  Clements.  How  do  you  dispose  of  the 
fact  that  prior  to  the  control  of  the  Southern  Pacific  by 
the  Union  Pacific  there  were  separate  and  competing 
agencies  and  solicitation  for  freight  in  Chicago,  Cin- 
cinnati, and  many  other  cities  in  the  Central  West, 
soliciting  it  on  the  one  hand  to  go  over  the  Union  Pa- 
cific and  on  the  other -hand  to  go  over  the  Southern 
Pacific,  and  that  those  agencies  have  been  since  that 
time  consolidated  ? 

Mr.  LovETT.  The  Southern  Pacific  agency  at  Chi- 
cago, as  the  testimony  shows,  always  worked  for  the 
Union  Pacific-Central  Pacific  line.  The  agents  worked 
for  that  line,  because  the  Sunset  line  was  an  impracti- 


91 

cable  route  from  that  territory.  The  Southeril  Pacific, 
of  course,  wanted  all  the  business  it  could  get  for  that 
line  because  the  Southern  Pacific  owned  850  miles  of  it. 

In  San  Francisco  the  Denver  &  Rio  Grande  and  all 
these  transcontinental  lines  had  their  agents.  The 
Southern  Pacific  had  no  preference  as  between  the  Den- 
ver &  Rio  Grande  and  the  Union  Pacific.  It  said, 
"  Go  out  and  get  the  business.  If  you  can  get  it  over 
your  line  from  Ogden,  it  is  immaterial  to  me.  I  will 
give  it  at  Ogden  to  whoever  gets  it  from  the  shipper. 
Take  it  at  the  rates  we  agree  upon,  as  shown  by  our 
division,  and  if  you  can  get  it  beyond  Ogden  I  am  not 
interested."  Since  then  the  Union  Pacific,  by  this 
purchase,  l:)ecame  the  preferred  connection  of  the 
Southern  Pacific.  There  is  no  longer  any  necessity  for 
its  having  any  solicitor  in  the  field  at  San  Francisco, 
because  whatever  business  shippers  want  sent  all  rail 
the  Southern  Pacific  will  turn  over  to  the  Union  Pa- 
cific unless  otherwise  instructed  by  the  shippers.  The 
public  is  not  interested  in  that.  The  Denver  &  Rio 
Grande  people  have  been  complaining  some  about  it, 
but  that  amounts  to  nothing,  because  it  is  a  matter  of 
the  selection  of  our  connection,  which  we  have  the  right 
to  do  under  the  law.  The  necessity  for  the  separate 
agencies  has  been  dispensed  with  in  that  way.  ■  There 
are  other  agencies  that  have  been  dispensed  with,  where 
there  was  some  competition,  and  I  will  come  to  that 
in  a  moment. 

The  next  situation  to  which  I  shall  call  your  honors^ 
attention  is  at  Portland,  Oreg. 

It  is  true  that  the  testimony  shows  that  there  was 
some  competition  between  the  Union  Pacific  System  and 
the  Southern  Pacific  at  and  in  the  vicinity  of  Portland. 
As  I  have  already  stated,  Portland  is  the  only  common 
point  of  the  two  systems,  except,  of  course,  Ogden, 
where  the  two  companies  connect  to  form  the  transcon- 
tinental line.  But  our  answer  is  that  the  competitive 
traffic  at  Portland,  in  volume  and  revenue,  is  so  small 
as  compared  with  the  entire  traffic  of  the  two  systems. 


92 

that  it  is  insignificant  and  legally  unimportant.  I 
have  not  had  the  figures  prepared  as  yet,  but  from  the 
opinion  of  those  best  informed  I  feel  safe  in  saying  that 
it  would  not  amount  to^  one-tenth  of  1  per  cent  of  the 
total.  Without  undertaking  to  recite  the  testimony, 
the  facts  developed  are  that  the  merchants  of  Portland 
who  get  goods  from  the  Atlantic  seaboard  ship  them 
as  a  rule  by  the  short  all-rail  routes;  that  is,  to  the 
Missouri  River,  thence  via  the  Union  Pacific  or  via 
the  Northern  Pacific  or  Great  Northern — the  latter 
using  the  Union  Pacific  line  from  Spokane  into  Port- 
land— but  that  sometimes  they  have  sent  goods  via  the 
Southern  Pacific;  that  is,  by  steamers  from  New  York 
to  New  Orleans  and  Galveston,  thence  via  rail  across 
Texas,  New  Mexico,  and  Arizona  to  Southern  Cali- 
fornia, and  northerly  via  San  Francisco  or  Sacramento 
to  Portland.  The  distance  from  New  York  to  Port- 
land via  this  route  is  about  5,000  miles  and  over  several 
mountain  ranges,  whereas  from  New  York  to  Portland 
by  all  rail  is  about  3,200  miles.  The  Portland  mer- 
chants have  testified  that  the  Southern  Pacific  route 
was  rarely  used  by  them,  because  time  and  distance 
was  against  it.  The  Union  Pacific  always  has  been 
and  still  is  the  prefen-ed  route  for  this  business. 

The  Portland  merchants  ship  nothing  east  of  the 
Missouri  River;  hence  what  I  have  just  said  disposes 
of  any  competition  with  respect  to  transcontinental 
traffic,  so  far  as  Portland  is  concerned. 

It  also  appeared  that  prior  to  1901  lumber  manufac- 
tured at  Portland  and  destined  to  Ogden  and  points  in 
Utah  and  Colorado  was  sometimes  shipped  via  the 
Southern  Pacific  as  well  as  the  Union  Pacific.  When 
moving  by  the  Southern  Pacific  it  was  carried  from 
Portland  over  the  Siskiyou  Mountains  to  Sacramento, 
Cal.,  and  thence  over  the  Sierra  Nevada  Mountains 
to  Ogden,  a  distance  of  1,400  miles;  and  when  moving 
via  the  Union  Pacific  system  it  was  carried  by  the 
O.  R.  &  N.  and  Oregon  Short  Line  over  moderate 
grades  to  Ogden,  a  distance  of  about  850  miles.  The 
volume  of  lumber  thus  moving  over  the  Southern  Pa- 
cific was  very  small.     In  1901,  after  the  Union  Pacific 


93 

purchased  the  stock  of  the  Southern  Pacific  and  Mr. 
Stubbs  was  made  traffic  director  of  both  systems,  the 
Southern  Pacific  canceled  its  rates  on  lumber  from 
Portland  via  Sacramento  and  Ogden  to  Utah  and  Colo- 
rado points,  and  all  such  lumber  was  required  to  move 
over  the  shorter  and  more  direct  route  of  the  Union 
Pacific.  But  the  rates  were  not  increased,  and  all  the 
shippers  who  testified  said,  what  is  obviously  true,  that 
the  Union  Pacific  route  of  850  miles  was  better  than 
the  Southern  Pacific  route  of  1,400  miles,  and  the  cost 
of  transportation  was  necessarily  much  less,  and  that 
except  during  the  extraordinary  car  shortage  and  con- 
sequent congestion  of  last  autumn  the  service  was  much 
better  than  it  had  ever  been  via  the  Southern  Pacific 
and  Sacramento  route. 

It  also  appeared  that  the  O.  R.  &  N.  Co.  owned  two 
or  three  small  river  steamboats  which  operated  on  the 
Willamette  River  between  Portland  and  Salem,  Oreg., 
and  also  owned  two  small  steamers  of  1,500  tons  each 
which  operated  between  Portland  and  San  Francisco. 
It  was  claimed  that  the  Willamette  River  steamers 
competed  with  the  Southern  Pacific  line  which  runs 
near  the  Willamette  River  for  the  business  between 
Portland  and  Salem,  and  that  the  Portland  and  San 
Francisco  steamers  competed  with  the  rail  line  of  the 
Southern  Pacific  from  Portland  across  the  Siskiyou 
Mountains  to  San  Francisco.  Ben.  Campbell,  now  vice- 
president  of  the  Great  Northern  Railway'  Company, 
in  charge  of  traffic,  who  in  1901  and  for  many  years 
theretofore  was  general  freight  agent  and  traffic  man- 
ager of  the  O.  R.  &.  N.  Co.  and  its  boat  lines,  testified 
there  never  was  any  appreciable  competition  between 
the  Willamette  boats  and  the  Southern  Pacific,  except 
perhaps  for  some  local  intrastate  business  between  Port- 
land and  Salem  and  intermediate  points ;  that  the  trad- 
ing of  that  territory  was  with  Portland  and  not  San 
Francisco,  and  that  such  of  the  products  of  the  Wil- 
lamette Valley  as  moved  to  San  Francisco  were  car- 
ried by  the  boat  line  to  Portland  and  then  transferred 
to  the  boat  line  for  San  Francisco,  and  the  Southern 
Pacific  never  really  attempted  to  meet  the  water  rates 


94 

and  carry  such  farm  products  over  the  mountains  to 
San  Francisco. 

With  i-espect  to  the  O.  E.  &  X.  Co.  boats  between 
Portland  and  San  Francisco,  Mr.  Campbell  and  others 
testified  in  substance  that  there  never  was  any  recogniz- 
able competition  between  such  boats  and  the  Southern 
Pacific  rail  line;  that  the  cargo  was  almost  wholly 
south  bound,  consisting  of  lumber  and  farm  products, 
the  latter  coming  chiefly  from  the  O.  R.  &  X.  Co.'s  rail 
lines  in  eastern  Oregon  and  AA'ashington,  and  there  was 
more  of  this  traffic  than  the  boats  could  carry.  Hence 
they  seldom  sought  other  south  bound  business, 
whereas  north  bound  but  little  freight  moved,  and 
much  of  that  was  destined  to  points  on  the  rail  lines 
of  the  O.  R.  &  N.  Co.,  the  boat  line  being  run  chiefly 
as  an  auxiliary  of  the  rail  lines  of  the  O.  R.  &.  X.  Co. 
During  some  seasons  the  boats  did  a  good  passenger 
business,  but  whether  passengers  went  by  rail  or  by 
boat  always  depended,  of  course,  mostl}"^,  if  not  en- 
tirely, upon  the  question  of  time  and  the  personal  atti- 
tude of  the  passenger  toward  a  sea  voyage  rather  than 
upon  any  diffei-ence  in  rates. 

Xow,  a  word  as  to  the  oriental  business. 

The  Union  Pacific  system  in  1901 — I  do  not  recall 
whether  it  was  before  or  after  the  purchase  of  the  stock 
of  the  Southern  Pacific — organized  the  Portland  and 
Asiatic  Steamship  Company.  That  company  was  or- 
ganized in  1001  under  the  laws  of  Oregon,  with  a  capi- 
tal of  $100,000,  as  I  recall,  and  all  its  stock  is  owned 
by  the  O.  R.  &  X.  Co.  Upon  its  organization  it  char- 
tered three  steamers,  and  since  then  it  operated  those 
steamers  until  the  expiration  of  their  charters,  and  has 
since  operated  other  chartered  steamers  between  Port- 
land and  Asiatic  ports.  By  reference  to  a  statement  of 
its  earnings  and  expenses  for  five  years  ending  June  30, 
1906.  which  will  be  found  in  the  printed  pamphlet  of 
Exhibits,  page  128,  it  will  be  seen  that  it  has  lost  money 
every  year  since  it  was  organized,  except  the  year  1904-5, 
during  the  Russo-Japanese  war,  when  it  made  $63,000, 
and  that  the  net  loss  for  the  five  years  ending  June  30 
last  was  $283,000. 


95 

The  original  capital  of  the  company  has  thus  been 
more  than  exhausted  and  it  is  a  mere  i^aper  concern, 
its  stock  being  so  worthless  that  I  find  the  comptroller 
throws  it  out  and  does  not  include  it  in  the  statements 
of  the  assets  of  the  O.  R.  &  N.  Co. 

The  question  naturally  arises  why  do  the  ships  run 
when  they  are  so  consistently  unprofitable?  The  an- 
swer is — solely  for  the  protection  of  the  grain  traffic  of 
the  O.  R.  &  N.  Co.'s  rail  lines  and  that  company's  cus- 
tomers in  Portland.  There  is  a  very  rich  grain  terri- 
tory in  eastern  Oregon  and  Washington  reached  by  the 
rail  lines  of  the  O.  R.  &  N.  Co.  and  by  the  Northern 
Pacific.  Most  of  the  flour  produced  finds  a  market  in 
the  Orient.  There  are  several  steamship  lines  opera- 
ting between  Puget  Sound  ports  and  Asiatic  ports  and 
but  one  from  Portland.  If  that  line  should  be  taken 
off,  all  the  grain  from  the  territory  mentioned  would 
move  over  the  Northern  Pacific  to  Puget  Sound  and 
then  to  the  Orient,  and  the  O.  R.  &  N.  Co.  rail  lines 
would  lose  the  haul  to  Portland,  and  the  flour  mills  at 
Portland  and  other  points  on  the  O.  R.  &  N.  would 
close.  It  is,  therefore,  to  hold  this  traffic  to  the  rail 
lines  of  the  O.  R.  &  N.  and  preserve  the  milling  interest 
at  Portland  that  the  steamers  are  operated  between 
Portland  and  the  Orient.  I  assume  that  the  profit  on 
the  rail  haul  is  sufficient  to  recoup  the  loss  on  the 
steamers. 

Before  forming  the  Portland  &  Asiatic  S.  S.  Co.  to 
charter  the  steamers,  the  O.  R.  &  N.  Co.  had  made  many 
experiments  bj"  contracts  with  shipowners  who  would 
undertake  to  put  on  steamers  between  Portland  and  the 
Asiatic  ports  but  who  successively  found  them  unprofit- 
able and  retired  from  the  business.  There  was  the 
Doddwell  Line,  the  Samuels  Line,  and  an  adventurer 
named  Graham,  who  made  some  pretensions  toward  es- 
tablishing a  line,  but  none  of  them  succeeded,  and  the 
responsible  ones  retired  to  avoid  further  losses. 

I  submit  that  a  paper  corporation  owning  no  vessels 
and  operating  ships  only  under  charter  contracts  and 
losing  money  on  every  trip  was  scarcely  a  factor  for 
3568—07  M 7 


96 

consideration  in  such  a  transaction  as  the  purchase  by 
the  Union  Pacific  of  the  stock  of  the  Southern  Pacific. 

More  than  this,  the  Union  Pacific  was  at  that  time 
and  had  been  for  many  years  before  and  still  is  the 
owner  of  one-half  of  the  capital  stock  of  the  Oriental  & 
Occidental  Steamship  Company,  which  operates  ships 
between  San  Francisco  and  the  Asiatic  ports.  It  is 
apparent  from  all  the  circumstances  that  whatever  busi- 
ness the  Union  Pacific  handled  between  points  east  of 
the  Missouri  River,  or  even  points  on  its  own  line  and 
the  Orient,  it  was  manifestly  to  its  interest  for  it  to 
move  via  Ogden  and  San  Francisco  and  the  Oriental  & 
Occidental  Steamship  Company  rather  than  via  Port- 
land and  the  chartered  steamers  between  Portland  and 
Asiatic  ports.  At  all  events,  it  certainly  was  not  to  its 
interest  to  cut  Asiatic  rates  via  its  Portland  line  when 
its  interest  in  the  Oriental  &  Occidental  Company 
w^ould  suffer. 

The  testimony  also  shows  that  the  Portland  Steam- 
ship Line  was  never  able  to  handle  transcontinental  busi- 
ness to  or  from  Asia  and  for  these  quite  obvious  reasons : 
As  a  rule  there  was  but  one  sailing  a  month,  whereas 
from  San  Francisco  there  was  a  steamer  every  nine 
days.  If  the  merchants  in  New  York  or  Chicago  had 
goods  for  Asia  and  shipped  via  Portland,  it  was,  of 
course,  subject  to  the  usual  chances  of  delay  in  rail 
transportation,  and  if  the  goods  should  arrive  at  Port- 
land a  day  after  the  ship  sailed,  they  would  have  to 
remain  there  for  thirty  days,  whereas  at  San  Francisco 
the  delay  at  most  would  be  only  nine  days.  Of  course 
no  business  man  would  hesitate  about  the  selection  of 
routes  under  these  conditions.  The  same  disadvantage 
operated  on  business  from  the  Orient,  because  generally 
there  would  be  instructions  by  shippers  not  to  route 
that  way,  although  the  Portland  boats  did  get  a  small 
percentage  of  the  inbound  traffic.  The  entire  inbound 
traffic,  however,  including  that  for  Portland  and  vicin- 
ity, was  very  small.  Mr.  Campbell  testified  that  out  of 
a  total  tonnage  of  the  Portland  Asiatic  Line  90  per  cent 
was  outbound  and  only  10  per  cent  homebound. 

There  is  only  one  other  point,  I  believe,  that  I  wish 


97 

to  call  attention  to.  That  is  the  Clark  road.  Much  im- 
portance seems  to  have  been  attached  in  this  inquiry  to 
the  Clark  or  San  Pedro  line — sometimes  called  the 
Clark  road.  It  is  the  road  from  Salt  Lake  to  San 
Pedro.  Much  importance  seems  to  be  attached  to  that 
situation  which  I  have  not  been  able  to  appreciate. 

The  facts  with  respect  to  that  matter,  briefly  stated, 
are  that  the  Oregon  Short  Line  R.  K.  Co.  owned  a  line 
extending  southwesterly  from  Salt  Lake  City  to  a  point 
near  the  Utah-Nevada  boundary  line  and  a  graded  or 
partially  constructed  line  extending  farther  and  well 
into  Nevada,  when  in  1902  Senator  Clark,  of  Montana, 
who  then  owned  the  San  Pedro-Los  Angeles  road, 
began  preparations  for  the  extension  of  it  to  Salt  Lake. 
Both  parties  had  surveyors  in  the  field,  and  there  was  a 
race  for  the  choice  of  location  through  canyons  which 
the  Oregon  Short  Line  won ;  and  a  controversy  over  the 
possession  of  some  unfinished  grade  was  also  decided  in 
favor  of  the  Oregon  Short  Line.  Negotiations  were 
taken  up,  and  in  July,  1902,  a  preliminary  agreement 
was  reached  which  was  followed  by  the  final  agree- 
ments of  June  and  July,  1903.  By  those  agreements 
Mr.  Harriman,  acting  for  the  Oregon  Short  Line,  and 
Senator  Clark  agreed  to  establish  a  line  of  railroad  be- 
tAveen  Salt  Lake  City  and  San  Pedro;  that  a  company 
to  complete  such  lines  should  be  formed,  one-half  of  the 
stock  of  which  should  be  owned  by  the  Oregon  Short 
Line  and  one-half  by  Senator  Clark,  and  each  to  fur- 
nish one-half  of  the  money  necessary  to  complete  the 
line;  and  the  road  of  the  Oregon  Short. Line  south 
of  Salt  Lake  City,  including  the  unfinished  grade,  and 
the  San  Pedro-Los  Angeles  roads  of  Senator  Clark, 
were  sold  to  the  joint  company.  The  work  of  construc- 
tion was  commenced  and  diligently  prosecuted  to  com- 
plete the  link  between  Los  Angeles  and  the  Oregon 
Short  Line  extension.  The  money,  amounting,  as  I 
recall,  to  something  like  $20,000,000  in  cash,  was  fur- 
nished, and  the  line  was  opened  to  business  in  May,  1905. 

I  can  well  understand  how  one  company  owning 
an   existing  line   might  be   prohibited   by   law    from 


98 

buying  a  parallel  line.  That  is,  at  least,  a  debatable 
question.  There  is  competition  between  such  lines. 
For  instance,  I  can  understand  why  the  Northern  Pa- 
cific should  be  prohibited  from  buying  the  Great  North- 
ern, but  I  can  not  understand  how  there  can  be  any 
restriction  or  suppression  of  competition  by  one  com- 
pany which  owns  an  existing  line  building  a  parallel 
line. 

So  I  submit  the  somewhat  obvious  proposition  that 
there  can  not  be  any  restriction  of  competition  unless 
there  is  competition  to  be  restricted,  or,  at  least,  unless 
there  is  a  situation  admitting  of  competition. 

Now,  the  laws  of  many  States  prohibit  one  corpo- 
ration owning  a  line  of  railroad  from  buying  the  stock 
or  in  any  way  controlling  a  corporation  owning  a  com- 
peting line,  but  there  are  not  many  that  prohibit  the 
building  of  other  lines.  There  is  rather  a  widespread 
impression  in  this  country  now  that  a  good  many  of 
the  roads  ought  to  have  double  tracks.  If  it  is  un- 
lawful for  a  company  owning  one  line  to  build  a 
parallel  line  because,  if  separately  owned,  they  might 
compete,  the  logical  result  of  that  argument  would  be 
that  a  company  owning  a  single-track  road  ought  not  to 
build  a  double-track  road  because,  having  two  tracks 
parallel,  if  they  were  owned  by  separate  companies 
there  might  be  competition  between  them. 

The  Union  Pacific  bought  the  stock  of  the  Southern 
Pacific  in  1901.  If  that  purchase  was  lawful  at  the 
time  it  was  effected,  I  can  not  quite  see  why  the  building 
of  a  competing  line  afterwards  would  render  the  pur- 
chase unlawful.  If  the  Union  Pacific  to-day  saw 
proper  to  build  a  line  to  the  Pacific  Ocean  parallel 
with  the  Central  Pacific,  I  take  it  that  would  not  be 
unlawful;  it  would  not  be  in  restriction  of  competi- 
tion, because  there  is  only  one  line  there  now. 

Commissioner  Lane.  Do  you  not  regard  the  contract 
as  vicious?  I  do  not  mean  as  to  the  extension  of  the 
Short  Line's  road  southwest  from  Salt  Lake  City  in 
connection  with  Clark,  but  the  contract  which  they 
undertake  for  ninety-nine  years  to  control  the  roads. 


99 

Mr.  LovETT.  The  traffic  contract — I  will  discuss  that 
in  a  moment.  If  your  honors  will  permit  me,  I  will 
pass  it  for  a  moment. 

I  will  deal  first  with  the  purchase  of  the  road.  I  do 
not  think  I  have  misunderstood  counsel's  contention 
in  regard  to  this  matter,  that  it  is  not  merely  the 
traffic  contract,  but  it  is  the  ownership  of  the  Clark 
road  that  is  involved.  If  there  is  no  question  to  be 
raised  as  to  the  legality  of  that,  of  course  I  will  not  dis- 
cuss it,  but  I  have  understood  that  the  contention  among 
others  is  that  the  Union  Pacific,  having  this  stock 
of  the  Southern  Pacific,  had  now  gotten  another  and 
competing  line  into  southern  California.  My  answer 
to  that,  without  further  enlarging  upon  it,  is  that  we, 
with  Senator  Clark,  built  that  line.  There  was  no 
line  there;  there  was  no  railroad,  and  we  built  it  just 
as  we  might  to-day  build  a  line  paralleling  the  Central 
Pacific  from  Ogden  to  the  Pacific  Ocean;  and  that  there 
is  nothing  in  the  antitrust  law  to  prohibit  it,  because 
it  is  not  a  suppression  or  restriction  of  competition. 
We  had  already  acquired  our  interest  in  the  stock  of  the 
Southern  Pacific.  It  was  not  as  if  we  had  gone  in  and 
bought  a  constructed  line  after  we  had  bought  the 
Southern  Pacific  stock.  That  would  present  a  differ- 
ent question.  We  built  it  just  as  we  might  build  a 
parallel  line  with  any  other  existing  line. 

Now,  in  reference  to  the  traffic  contract.  I  do  not 
know  a  great  deal  about  that,  but  the  men  who  made 
it  say  that  it  applies  only  to  local  traffic  in  California. 
I  take  it  that  there  is  no  local  traffic  as  between  the 
Southern  Pacific  and  the  Clark  road  except  in  Southern 
California.  They  do  not  serve  the  same  territories  ex- 
cept in  Southern  California.  There  is  no  local  traffic 
between  those  roads  except  the  traffic  in  California. 

I  understand  perfectly  well  that  in  ordinary  railway 
parlance  "  local  traffic  "  means  traffic  taken  up  and  put 
down  on  the  same  road.  I  take  it  that  traffic  between 
Los  Angeles  and  Salt  Lake  City  would  be  local  traffic 
so  far  as  the  Clark  road  is  concerned,  but  local  traffic  as 
between  the  Southern  Pacific  and  the  Clark  road  means 


100 

traffic  local  to  both  lines,  to  those  competing  lines  within 
the  State  of  California  ^Yhe^e  they  serve  the  same 

Commissioner  Lane.  It  does  not  say  that.  It  simply 
says  "  local  traffic." 

Mr.  LovETT.  It  says  "  local  traffic  which  may  be  com- 
petitive," and  the  only  competition  between  them  is  in 
California. 

Commissioner  Laxe.  Would  not  that  be  competitive 
between  Salt  Lake  City  and  Los  Angeles,  or  the  Sacra- 
mento gateway? 

Mr.  LovETT.  Not  at  all.  The  Southern  Pacific  does 
not  go  to  Salt  Lake  City.     It  goes  to  Ogden. 

Commissioner  Lane.  To  Ogden  ? 

Mr.  Lovett.  Yes.  I  have  never  assented  to  the  prop- 
osition, and  I  never  will,  until  the  courts  declare  it,  that 
railroads  can  be  competing  which  connect  only  at  one 
place  and  serve  different  territories. 

Commissioner  Lane.  Yes ;  but  they  touch  two  points. 
Here  is  the  Central  Pacific,  which  touches  Ogden  and 
goes  around  Sacramento  and  down  to  Los  Angeles. 

Mr.  Lovett.  No;  the  Clark  road  does  not  go  to 
Ogden. 

Commissioner  Lane.  It  runs  to  Salt  Lake  City  ? 

Mr.  Lovett.  It  runs  to  Salt  Lake  Cit}\ 

Commissioner  Lane.  There  is  a  difference  of  36 
miles 

Mr.  Lovett.  AMiich,  so  far  as  that  contract  is  con- 
cerned, fixes  the  definition  of  local  traffic  in  the  way  that 
all  the  men  who  made  it  have  testified,  that  is  in  Cali- 
fornia. As  to  whether  they  might  compete  from  Salt 
Lake,  it  is  not  necessary  to  determine. 

Commissioner  Lane.  Mr.  Clark  informs  me  that  the 
Union  Pacific  has  a  line  from  Ogden  to  Salt  Lake, 
which  would  bring  them  into  direct  connection. 

Mr.  Lovett.  Undoubtedly  the  Union  Pacific  has  a 
line  from  Ogden  to  Salt  Lake,  but  the  Southern  Pacific 
has  not. 

Commissioner  Lane.  But  the  Southern  is  controlled 
by  the  LTnion  ? 

Mr.  Lovett.  Yes;  undoubtedly;  and  the  Union  Pa- 
cific has  a  large  voice  in  the  control  of  the  Clark  road. 


101 

But  such,  as  I  understand,  is  the  position  of  our  people 
in  reference  to  the  traffic  contract. 

It  says  "  local  traffic  in  competition  between  the 
Southern  Pacific  and  the  Clark  road,"  and  they  say 
the  only  local  traffic  that  was  contemplated  is  traffic 
local  in  California,  and  that  under  the  laws  of  Cali- 
fornia such  contracts  are  legal.  Of  course  it  could  be 
amended  to  confine  it  to  California  territory.  That  is 
what  the  men  who  made  the  contract  and  who  are 
familiar  with  the  situation  testified,  as  I  understand 
it.  But  I  do  know  that  the  traffic  between  Salt  Lake 
City  and  the  Papific  coast,  so  far  as  the  Southern  Pacific 
is  concerned,  is  not  local  traffic  as  to  that  line.  It  gets 
there  through  connection  with  the  Union  Pacific,  just  as 
it  gets  to  the  Atlantic  seaboard. 

Commissioner  Lane.  Is  the  ownership  of  the  Clark 
road  in  the  same  condition  to-day  as  it  was  when  these 
hearings  were  had  in  Los  Angeles? 

Mr.  LovETT.  Yes. 
0    Commissioner  Lane.  There  have  been  announcements 
in  the  newspapers  that  it  was  not.     I  did  not  know 
whether  that  was  correct  or  not. 

Mr.  LovETT.  The  report  is  absolutely  without  any 
foundation. 

I  believe  there  is  one  other  point,  that  is  as  to  the  lines 
in  Northern  California  that  were  formerly  owned  by  the 
Southern  Pacific  and  the  Atchison  and  that  were  re- 
recently  consolidated.  But  little  need  be  said  about 
that  situation,  as  I  view  it. 

The  Southern  Pacific  owned  two  or  three  small  roads 
up  there.  The  Atchison  had  incorporated  some  com- 
panies that  were  building  lines  from  the  coast  in  the 
northern  portion  of  California,  southeasterly;  and  the 
Southern  Pacific  was  building  in  the  opposite  direc- 
tion— that  is,  building  northwesterly.  Their  lines  were 
separated  by  mountains.  They  had  not  gotten  together 
anywhere,  and  the  Atchison  lines  could  scarcely  be  con- 
sidered as  operating  railroad.  The  mileage  was  very 
small  and  they  were  widely  separated  from  the  South- 
ern Pacific  lines.  As  the  result  of  negotiations  that 
were  commenced  in  1905 — early  in  1905 — they  agreed 


102 

upon  a  basis  for  the  consolidation  of  those  lines.  They 
consolidated,  as  authorized  by  the  laws  of  California, 
the  State  by  which  all  the  corporations  were  created 
and  where  all  the  property  is  situated. 

Our  contention  is  that  that  is  not  a  matter  of  any 
concern  to  any  Federal  authority;  that  California  cre- 
ated these  corporations;  they  had  no  lines  extending 
across  the  borders  of  the  State ;  that  they  were  not  com- 
peting, as  they  had  not  been  constructed,  and  that  Cali- 
fornia had  the  right  to  abrogate  the  corporate  powers, 
so  far  as  they  existed  under  the  charters,  and  with  the 
consent  of  the  owners,  take  away  by  consolidation  the 
right  to  build  more  than  one  line,  and  that  it  was  in 
the  exercise  of  its  power  over  those  corporations,  which 
it  had  created,  that  these  consolidations  were  permitted ; 
and  although  when  completed  the  roads  may  engage 
in  interstate  commerce,  they  are  not  competing  roads 
to-day,  because  they  are  not  completed. 

Construction  through  that  territory  is  enormously 
expensive.  I  think  that  one  of  the  connecting  links  will 
cost  over  $100,000  a  mile  in  cash,  and  it  is  going  to  re-* 
quire  a  very  large  outlay  of  money;  but  there  is  not 
traffic  enough  there  for  one  road,  much  less  two.  It  is 
an  undeveloped  country.  So  they  have  united  their 
forces  to  develop  that  territory  and  build  roads  that  in 
all  these  years  and  in  these  days  of  railway  building 
have  not  been  built  because  the  undertaking  was  too 
great  for  the  returns  that  were  promised. 

I  must  apologize  to  the  Commission  for  the  time  I 
have  taken.  I  had  no  intention  of  consuming  so  much 
time,  and  I  regret  very  much  that  I  have  talked  so  long. 

Commissioner  Clements.  We  have  been  very  glad  to 
hear  you,  Mr.  Lovett. 

ARGUMENT   OF   MB.    JOHN   G.    MILBURN. 

Mr.  MiLBURN.  May  it  please  the  Commissioner,  I 
shall  confine  what  I  have  to  say  to  the  purchase  by  the 
Union  Pacific  of  the  interest  which  it,  or  the  Oregon 
Short  Line,  owns  in  the  Southern  Pacific.  After  listen- 
ing to  the  very  comprehensive  and  complete  argument  of 
Judge  Loyett  on  the  subject  I  would  ordinarily  be  in- 


103 

clined  to  say  nothing  more,  and  there  is  really  very  little 
that  I  can  add,  but  as  this  is  a  very  important  matter  I 
am  perhaps  justified  in  making  an  additional  argument, 
though  it  may  involve  some  repetition. 

I  feel  that  the  question  before  the  Commission  is  one 
of  the  most  important  it  has  ever  had  to  consider,  and 
one  more  vitally  affecting  the  railroad  interests  of  the 
country  than  any  that  could  be  raised.  If  the  owner- 
ship or  control  of  the  Southern  Pacific  by  the  Union 
Pacific  be  illegal  because  of  any  interference  with  com- 
petition, every  important  railroad  system  in  the  United 
States  is  illegal.  The  Union  Pacific  system  with  its 
control  of  the  Southern  Pacific  is  in  that  regard  the 
least  vulnerable  of  any  of  the  great  systems.  The  phys- 
ical locations  of  the  Union  Pacific  and  Southern  Pacific 
railroads  are  such  that  their  union  in  a  single  system 
if.  a  possible  interference  with  competition  in  a  very 
minor  degree  as  compared  with  the  conditions  which 
other  systems  present.  In  the  records  of  the  Commis- 
sion, consisting  of  the  annual  reports  of  railroad  com- 
panies which  have  been  put  upon  its  files  year  in  and 
year  out,  there  is  the  evidence  of  great  systems  of  rail- 
roads slowly  built  up  through  the  years  by  the  com- 
pacting together  of  lines  between  different  points  the 
competitive  relations  of  which  are  and  were  apparent. 
Even  trunk  lines  through  extensive  and  populous  re- 
gions of  the  country  practically  parallel  with  each  other 
have  been  welded  together  into  a  single  system  by  stock 
ownership,  or  in  some  other  way.  If  that  be  an  offense 
against  the  law,  the  Union  Pacific  in  the  control  that 
it  has  acquired  of  the  Southern  Pacific  is  the  most  in- 
significant offender,  and  if  you  recommend  proceedings 
against  it  you  can  not  refrain  from  recommending  pro- 
ceedings against  the  others.  This  is  a  government  of 
law,  not  of  men,  and  a  government  of  law  is  one  which 
applies  the  law  equally  to  all,  and  avoids  all  discrimina- 
tion between  persons  or  interests.  To  enforce  the  law 
ii  gainst  one  and  not  against  others  in  the  same  situation 
is,  as  Mr.  Justice  White  said  in  the  Northern  Securities 
case,  "  repugnant  to  every  principle  of  liberty  and  jus- 
tice."    It  is  because  so  many  and  such  vast  interests  are 


104 

involved  that  I  feel  there  is  a  great  deal  at  stake  in  the 
matter  before  the  Conunission,  and  that  a  step  is  under 
consideration  which  calls  for  profound  deliberation 
and  slowly  formed  conclusions.  It  may  therefore  be 
serviceable  to  you  to  bring  to  3'our  attention  what  I 
regard  as  the  governing  and  controlling  propositions  of 
law  and  fact  in  the  solution  of  the  problem. 

I  propose  to  discuss  the  matter  from  the  point  of  view 
of  the  law  as  it  is.  I  know  that  the  Commission  can  in- 
vestigate with  a  view  to  recommending  new  legislation, 
but  I  am  concerned  with  the  legality  of  what  has  been 
done,  and  not  with  the  enactment  of  new  laws.  I  am 
satisfied  if  I  can  establish  that  what  has  been  done  is 
legal.  If  it  be  legal,  whether  there  should  be  still 
more  radical  legislation,  whether  a  new  law  can  be 
drawn  which  will  be  more  comprehensive  in  its  scope 
and  operations  than  the  present  law,  I  leave  aside  as  a 
problem  which  I  need  not  consider  at  this  time. 

Was  the  acquisition  by  the  Union  Pacific  of  its  in- 
terest in  the  Southern  Pacific  a  legal  transaction? 
The  only  law  which  bears  upon  it  is  the  act  of  1890, 
entitled  "An  act  to  protect  trade  and  commerce  against 
unlawful  restraints  and  monopolies,"  popularly  known 
as  the  "  Sherman  act."  That  act  makes  illegal  every 
contract,  combination,  or  conspiracy  in  restraint  of  in- 
terstate or  foreign  trade  or  commerce.  Broad  as  this 
language  is,  it  has  its  limitations.  The  phrase  "  re- 
straint of  trade  "  has  been  treated  by  some  courts  and 
judges  as  the  equivalent  of  the  phrases  "  interference 
with  competition  "  or  "  suppression  of  competition."  I 
do  not  think  it  is,  but  whether  it  is  or  not  I  will  not 
stop  to  discuss  now,  as  I  am  willing  to  assume  them  to 
be  equivalents,  and  to  treat  the  act  as  denouncing  every 
contract,  combination,  or  conspiracy  to  interfere  with  or 
suppress  competition.  Mark,  it  is  an  intereference  with 
competition  by  a  contract,  combination,  or  conspiracy. 
For  a  transaction  to  be  within  the  act  there  must  be 
either  a  contract,  a  combination,  or  a  conspiracy.  Such 
a  classification  is  far  from  coextensive  with  the  busi- 
ness transactions  of  men  which  constitute  interstate 
commerce  and  affect  competition  in  one  way  or  another. 


105 

There  are  many  transactions  which  affect  competition 
which  are  neither  contracts,  combinations,  or  conspira- 
cies. There  is  very  evidently  a  wide  area  of  human 
conduct  in  the  domain  of  interstate  trade  and  com- 
merce which  the  act  does  not  touch  at  all.  In  enacting 
this  law  Congress  was  dealing  only  with  certain  kinds 
or  classes  of  transactions  in  restraint  of  trade,  and  put- 
ting the  ban  of  law  upon  them,  and  therefore  all  other 
acts,  transactions,  and  relations  are  outside  the  pale  of 
the  act,  however  they  may  restrain  trade  or  affect  com- 
petition. 

Is  a  purchase  of  property  within  the  act?  There  is 
no  appropriate  phraseology  to  include  acquisitions  by 
purchase.  It  would  have  been  very  easy  if  it  had  been 
the  intent  of  Congress  to  prohibit  any  acquisition  of 
property  by  purchase  which  restrained  trade  to  say  so 
explicitly.  The  act  would  then  have  prohibited  any 
contract,  combination,  conspiracy,  or  purchase  of  prop- 
erty in  restraint  of  trade.  That  it  fails  to  include 
acquisitions  of  property  by  purchase  is  of  controlling 
significance  because  the  right  to  acquire  property  is  a 
fundamental  right  and  one  of  the  most  potent  factors 
in  our  civilization.  I  will  never  admit  that  this  right 
to  acquire  property  is  seriously  affected  by  legislation 
unless  there  is  clear  and  explicit  language  in  the  law  to 
that  effect. 

Commissioner  Clark.  Would  a  contract  for  pur- 
chase and  sale  come  within  the  limitation  of  the  con- 
tracts inhibited  by  the  act  ? 

Mr.  MiLBURN.  I  think  not,  sir.  If  a  purchase  would 
not,  I  do  not' think  a  contract  of  purchase  would. 

Commissioner  Clark.  Of  course  I  have  reference 
to  a  contract  that  by  its  effect  restrained  trade  and 
eliminated  competition. 

Mr.  MiLBURX.  Yes.  I  do  not  think  that  the  term 
"contract,"  Mr.  Commissioner,  is  an  appropriate  term 
to  bring  the  acquisition  of  property  by  purchase,  or 
a  restraint  of  trade  by  the  acquisition  of  property, 
within  the  act.  In  other  words,  if  an  act  were  being 
drawn  to  prescribe  that  competition  should  not  be 
interfered  with  or  suppressed  by  purchases  of  prop- 


106 

erty,  it  would  be  expressed  in  clear  terms  and  not  left 
to  be  inferred  from  such  terms  as  "  contract,"  "  combi- 
nation," or  "  conspiracy."  Had  the  intention  been  to 
include  purchases  it  would  have  been  clearly  revealed 
by  the  language  used.  But  that  could  not  have  been 
the  intention  because,  as  you  can  see  at  a  glance,  if 
purchases  of  property  which  affect  competition,  even  if 
they  were  made  for  that  purpose,  were  prohibited,  the 
business  of  the  country  would  be  seriously  crippled. 
This  act  applies  to  all  alike;  it  is  not  confined  to  rail- 
road companies.  Indeed,  there  was  a  grave  question 
as  to  whether  it  applied  to  railroads  at  all,  considering 
that  their  regulation  was  the  object  and  purpose  of  the 
interstate  commerce  act,  and  that  the  effort  to  amend 
the  bill  before  its  passage  to  expressly  include  railroads 
was  defeated.  Though  it  has  been  applied  to  railroad 
companies  by  construction,  the  point  I  am  making  is 
that  it  is  of  universal  application  with  respect  to  indi- 
viduals and  corporations,  and  reaches  all  individuals 
and  all  corporations.  Just  think  of  the  effect  of  read- 
ing into  it  that  any  purchase  of  property  which  re- 
strains trade  or  interferes  with  competition  is  illegal. 
A  man  buj's  a  store  of  a  competitor  who  sells  his  goods 
in  various  States ;  that  restrains  trade ;  is  it,  therefore, 
illegal  under  this  act  ?  Competitors  in  business  form  a 
copartnership  or  organize  a  corporation  to  which  they 
transfer  their  plants  and  businesses — is  that  illegal  under 
this  act?  But  it  is  unnecessary  to  multiply  illustra- 
tions. The  indisputable  fact  is  that  a  great  mass  of 
the  transactions  of  business  so  far  as  the  acquisition  of 
property  is  concerned  interfere  with  competition,  and 
to  prohibit  them  for  that  reason  would  derange,  if  not 
disrupt,  the  industrial  and  commercial  system  of  the 
country.  It  is  really  not  arguable  that  it  was  intended 
to  extend  the  prohibitions  of  the  act  to  the  right  to 
acquire  property  by  purchase. 

Let  us  now  see  to  what  transactions  the  act  has  been 
judicially  applied. 

An  agreement  between  practicall}'^  all  of  the  rail- 
roads in  an  extensive  region  to  maintain  rates  has  been 
held  by  the  Supreme  Court  to  be  an  agreement  prohib- 


107 

ited  by  the  act,  because  in  maintaining  rates  it  inter- 
fered with  the  free  play  of  competition.  Hence  it  is 
settled  that  a  combination  of  independent  railroads  to 
maintain  rates  is  a  combination  in  restraint  of  trade 
within  the  meaning  of  the  act. 

There  next  came  under  the  consideration  of  the  courts 
combinations  of  independent  manufacturers  engaged  in 
interstate  commerce  to  jfix  prices  and  regulate  produc- 
tion by  means  of  an  agreement,  or  a  selling  company,  or 
some  other  device,  and  th'ey  were  held  to  be  combina- 
tions in  restraint  of  trade  denounced  by  the  act. 

Then  came  the  Northern  Securities  case,  which  in- 
volved the  organization  of  a  holding  company  by  the 
stockholders  of*  two  great  competing  railway  systems 
extending  from  the  Lakes  to  the  Pacific  Ocean,  the 
Northern  Pacific  and  the  Great  Northern,  to  take  over 
their  shares  in  exchange  for  its  own  and  thereby  bring 
those  systems  under  a  single  control.  The  Supreme 
Court  held  that  this  was  a  combination  of  shareholders 
of  the  two  companies  to  suppress  competition,  and  that 
the  organization  of  the  holding  company  was  merely  a 
device  to  accomplish  that  purpose.  Treating  the  hold- 
ing company  as  machinery  to  effectuate  the  scheme  of 
the  combination,  the  court  held  that  the  combination 
was  the  substantial  matter  and  that  it  was  in  restraint 
of  trade  and  therefore  illegal. 

This  is  the  extent  of  the  authorized  interpretations 
and  application  of  the  act  down  to  this  time.  They  are 
obviously  very  far  from  bringing  out-and-out  pur- 
chases of  property  within  the  act  though  they  affect 
competition.  To  bring  them  within  the  act  will  be  a 
tremendous  extension  of  its  operation.  We  all  know 
that  during  the  last  twenty  years  there  has  been  going 
on  in  this  country  a  process  of  amalgamating  previ- 
ously independent  manufacturing  concerns  in  many  dif- 
ferent industries  through  purchases  and  stock  owner- 
ship. It  has  been  the  most  marked  feature  in  the  indus- 
trial development  of  the  country  during  that  period. 
I  am  within  bounds  in  saying  that  our  existing  indus- 
trial organization  is  largely  the  result  of  that  process. 
In  every  instance  there  was  a  substitution  of  a  single 


108 

concern  for  a  number  of  previously  independent  and 
competitive  concerns,  and  necessarily  an  interference 
with  competition.  In  every  instance  there  was  a  plan ; 
there  were  negotiations;  there  were  purchases.  Does 
anyone  maintain  that  they  are  illegal  because  of  their 
interference  with  competition?  But  it  is  clear  that 
these  great  industrial  combinations  depend  for  their 
legality  upon  the  proposition  that  acquisitions  of  prop- 
erty by  purchase  are  not  within  the  act  though  they 
eliminate  competition  on  a  vast  scale.  To  extend  and 
expand  it  now  to  include  them  would  be  an  incalculable 
shock  to  the  industrial  system  of  the  country. 

I  have  now  stated  my  fundamental  position.  I  have 
ventured  to  formulate  a  series  of  propositions  which 
are  in  the  main  deductions  from  it,  and  the  rest  of  my 
argument  will  be  based  upon  them.  They  embody  the 
results  of  my  study  of  the  act  and  the  cases  which 
have  construed  and  applied  it.  I  think  it  more  appro- 
priate and  time  saving  to  state  my  conclusions  in  that 
form  than  to  attempt  to  analyze  the  cases  separately 
and  in  detail,  particularly  as  we  are  all  so  familiar 
with  them. 

These  propositions  are  as  follows: 

(1)  A  restraint  of  trade  to  be  within  the  act  must 
be  the  direct,  immediate,  and  necessary  effect  of  the 
transaction,  and  not  merely  an  indirect  or  incidental 
result. 

(2)  A  restraint  of  trade  consequent  upon  a  purchase 
of  property,  in  any  of  its  various  forms,  is  incidental 
merely  and  therefore  not  within  the  act. 

(3)  The  purchase  must  of  course  be  real;  if  a  mere 
device  for  the  suppression  of  competition,  as  it  was 
held  to  be  in  the  Xorthern  Securities  case,  while  it 
may  be  effective  to  operate  upon  the  legal  title  as  be- 
tween the  parties,  it  is  in  fact  unsubstantial  and  may 
be  disregarded. 

(4)  Provided  the  purchase  be  real  and  substantial 
the  motive  which  induces  it  can  not  affect  the  result; 
for  any  resultant  restraint  of  trade  is  still  only,  con- 
sequential and  incidental  to  the  exercise  of  an  absolute 


109 

and   undoubted   right — that  is,  the   right   to   acquire 
property. 

(5)  Therefore  the  purchase  by  a  railroad  company, 
within  its  corporate  powers,  of  an  interest  in  another 
line  of  railway  is  not  W'ithin  the  act,  because  the  re- 
straint upon  trade,  if  any,  is  not  direct,  but  merely  in- 
cidental to  the  purchase. 

(6)  If,  however,  the  purchase  by  a  railroad  com- 
pany, within  its  coriDornte  powers,  of  a  line  of  railway 
be  obnoxious  to  the  act  if  made  to  suppress  competi- 
tion, that  result  does  not  follow  if  the  purchase  be 
made  for  a  legitimate  and  proper  purpose  of  the  pur- 
chasing company. 

(7)  In  any  event  a  purchase  by  a  railroad  company 
of  an  interest  in  a  line  of  railway  which  is  not  parallel 
and  competing  is  not  within  the  act. 

(8)  The  purchase  by  the  Union  Pacific  of  its  inter- 
est in  the  Southern  Pacific  was  not  made  to  suppress 
competition,  but  to  protect  its  property  by  an  exten- 
sion of  its  line  in  that  way  to  the  Pacific  coast. 

(9)  The  Union  Pacific  and  Southern  Pacific  are  not 
parallel  or  competing  lines  or  systems. 

As  I  am  addressing  lawyers  I  need  not  say  that  the 
terms  "  direct  "  and  "  immediate  "  and  "  indirect," 
"  consequential  "  and  "  incidental  "  are  terms  of  legal 
significance.  There  are  distinctions  in  the  use  of  them 
as  legal  terms  which  are  not  appreciated  by  the  lay 
mind.  But  to  lawyers  it  is  enough  to  say  that  the  un- 
derlying distinction  between  them  is  precisely  the  dis- 
tinction which  underlies  the  terms  "  proximate  cause  '" 
and  "  remote  cause  "  as  legal  terms.  In  other  words, 
if  a  contract  be  made  between  two  competing  concerns 
to  regulate  prices,  rates,  or  productions  the  effect  of  the 
transaction  upon  competition  is  in  legal  parlance  im- 
mediate and  direct.  If  a  transaction  respects  the  pur- 
chase of  property  its  immediate  and  direct  result  is 
the  acquisition  of  the  property,  and  any  results  that 
flow  from  the  ownership  of  the  property  are  incidental 
or  consequential.  That  illustrates  the  distinction  be- 
tween a  direct  and  an  indirect  or  consequential  re- 
straint of  trade  as  I  understand  it. 


110 

I  am  very  clear,  for  the  reasons  I  have  already  given, 
that  the  Shernian  Act  was  never  intended  to  reach  in- 
terference with  competition  in  all  the  various  kinds  of 
interstate  business  resulting  from  the  acquisition  of 
property  by  purchase,  even  though  the  motive  of  the 
purchase  was  to  absorb  a  competitor  or  to  amalgamate 
two  or  more  competitive  plants  or  businesses.  It  has 
been  suggested  that  the  case  of  Pearsall  v.  Northern 
Pacific  Eailroad  (161  U.  S.,  646)  is  adverse  to  that  con- 
clusion. That  case  involved  an  acquisition,  or  an  at- 
tempted acquisition,  by  the  Great  Northern  Railroad 
Company  of  an  interest -in  the  Northern  Pacific  Rail- 
road Company,  and  it  was  held  that  the  transaction 
was  illegal  because  in  violation  of  certain  acts  of  the 
State  of  Minnesota  to  which  both  companies  were 
subject.  The  Sherman  Act  was  not  involved  at  all 
and  the  case  is  not  an  authority  with  respect  to  the 
scope  and  operation  of  that  act  and  does  not  in  the 
slightest  degree  affect  the  proposition  I  have  advanced. 
If  the  law  of  the  State  which  created  the  Union  Pacific 
Railroad  Company  prohibited  it  from  making  such  a 
purchase  as  it  made  of  the  stock  of  the  Southern  Pacific, 
that  would  be  the  end  of  the  matter.  With  such  a  law 
in  existence  the  purchase  would  have  been  illegal  be- 
cause expressly  prohibited  by  the  State  to  which  the 
company  owed  its  being,  but  not  because  of  any  inter- 
ference with  competition;  not  because  of  the  operation 
of  the  Sherman  act.  If  there  were  in  the  laws  of  the 
State  governing  the  Union  Pacific  or  the  laws  of  the 
State  governing  the  Oregon  Short  Line  limitations 
upon  their  powers  far-reaching  enough  to  prevent  their 
acquiring  an  interest  in  the  Southern  Pacific,  we  would 
confront  a  very  different  question  than  any  raised  by 
the  present  record. 

Prior  to  the  purchase  of  its  interest  in  the  Southern 
Pacific  the  Union  Pacific  was  dependent  upon  an  en- 
tirely independent  line  west  of  Ogden  to  San  Francisco. 
A  legitimate  railroad  purpose  therefore  justified  it 
in  acquiring  that  line  or  the  control  of  it.  It  bought 
that  line — that  is,  it  bought  what  was  in  effect  the 
practical  control  of  that  line — for  the  purpose  of  oper- 


Ill 

ating  it  as  part  of  its  own  system  and  bringing  it 
under  the  policy  of  improvement  and  development  pur- 
sued with  respect  to  the  entire  system.  Having  that 
situation  in  mind,  I  insist,  without  further  elaboration, 
that  the  purchase  by  the  Union  Pacific  of  its  interest 
in  the  Southern  Pacific  was  a  real  and  substantial  pur- 
chase within  its  corporate  powers  and  for  a  corporate 
purpose,  and  nothing  but  a  purchase.  It  was-  not  a 
device  or  cover  for  anything  else.  A  real  and  substan- 
tial need  compelled  the  ownership  or  control  of  the 
Southern  Pacific's  line  from  Ogden  to  San  Francisco; 
and  the  only  way  in  which  it  could  be  acquired  was  to 
acquire  a  controlling  interest  in  the  stock  of  that  com- 
pany. It  did  acquire  that  interest  for  that  purpose; 
and  it  is  manifest  that  the  transaction  was  an  out  and 
out  purchase,  and  is  to  be  judged  as  such.  The  situa- 
tion is  a  very  different  one  from  that  presented  in  the 
Northern  Securities  case.  Here  the  Union  Pacific,  to 
control  a  through  line  to  the  Pacific  co'ast  and  protect 
itself  from  the  injurious  consequences  of  the  line  from 
its  western  terminus  at  Ogden  to  San  Francisco  pass- 
ing into  the  hands  of  adverse  interests  bought  45  per 
cent,  or  thereabout,  of  the  stock  of  the  Southern  Pacific 
Railroad  from  the  parties  who  owned  it.  That  stock 
ownership  gives  it  the  practical  control  of  a  connecting 
railroad  absolutely  necessary  to  the  integrity  of  its 
system.  In  the  Northern  Securities  case  it  appeared, 
as  the  court  construed  the  transaction,  that  certain 
interests  owning  stock  of  the  Great  Northern  and  of 
the  Northern  Pacific,  two  parallel  and  competing  sys- 
tems, organized  a  corporation  which  took  their  shares 
and  held  them,  exchanging  for  them  its  own  shares, 
and  thereby  through  the  new  company  those  interests 
were  enabled  to  control  and  operate  these  two  parallel 
and  competing  systems  in  harmony.  The  new  company 
was  not  in  any  sense  a  railroad  company,  but  purely 
a  holding  company,  and  as  such  merely  an  instru- 
mentality for  the  harmonious  control  of  existing  inde- 
pendent competing  railway  systems.  There  would  seem 
to  be  no  analogj'  between  the  -two  situations.  The  one 
was  the  vesting  of  control  of  independent  systems  in 
3568—07  M 8 


112 

a  holding  company ;  the  other  was  a  purchase  of  an  in- 
terest in  an  existing  railroad  company  by  an 'existing 
railroad  company  for  a  legitimate  and  necessary  cor- 
porate purpose  of  the  latter.  We  stand  firmly  on  the 
proposition  that  the  acquisition  by  the  Union  Pacific 
of  its  interest  in  the  Southern  Pacific  was  a  real  pur- 
chase. 

The  Sherman  act  is  not  an  act  specifically  pertain- 
ing to  railroads;  it  does  not  put  the  transactions  of 
railroad  companies  with  each  other  in  one  class,  the 
transactions  of  manufacturers  with  each  other  in  an- 
other class,  or  the  transactions  of  traders  with  each 
other  in  still  another  class;  it  does  not  differentiate 
transactions  with  respect  to  the  persons  who  engage  in 
them.  It  operates  upon  transactions  regardless  of  M'ho 
are  the  parties  to  them,  and  a  purchase,  therefore,  by  a 
railroad  company  having  the  power  to  make  it  stands 
on  precisely  the  same  footing  so  far  as  this  act  is  con- 
cerned, and  is  to  be  judged  by  the  same  rules  as  a  pur- 
chase by  an  individual  or  by  any  other  kind  of  cor- 
poration. If  a  purchase  by  an  individual  or  a  man- 
ufacturing or  business  corporation  be  outside  of  the  act 
notwithstanding  it  may  interfere  with  competition,  the 
purchase  by  the  Union  Pacific  of  its  interest  in  the 
Southern  Pacific  is  outside  of  it,  notwithstanding  it 
may  interfere  with  competition,  always  provided,  what 
is  not  disputed,  that  the  purchase  was  within  its  cor- 
porate powers  and  not  in  conflict  with  the  law  of  any 
State  to  which  the  two  companies  were  subject. 

But  it  may  be  argued  that  even  if  a  purcHase  for  a 
real  and  substantial  purpose  of  the  purchaser  be  not 
obnoxious  to  the  act,  though  it  involves  an  interference 
with  competition,  still  a  purchase  the  real  or  dominant 
motive  of  which  is  to  suppress  competition  or  to  elimi- 
nate the  conditions  which  competition  has  produced  is 
within  the  act,  I  can  see  no  basis  for  any  such  diflFerenti- 
ation.  The  act  is  directed  at  transactions,;  not  at  mo- 
tives. A  contract,  combination,  or  conspiracy  which  has 
as  its  subject-matter  the  control  in  some  degree  of  rates, 
prices  or  production  is  condemned  regardless  of  its 
motive.     Reasoning  by  analogy,  if  a  purchase  of  prop- 


113 

erty  is  not  a  transaction  within  the  categories  of  the  act 
it  should  not  be  brought  within  them  because  of  its 
motive.  And  there  are  practical  considerations  which 
lead  to  the  same  conclusion.  For  instance,  a  number  of 
businesses  owned  by  different  concerns  may  be  acquired 
by  one  of  them  with  mixed  motives;  such  as  the  bene- 
fits of  conducting  the  business  on  a  large  scale;  the 
advantages  of  various  distributing  points;  the  greater 
command  of  capital ;  the  elimination  to  some  extent  of 
competition.  Is  the  validity  of  the  transaction  to 
depend  on  the  comparative  weight  of  these  different 
motives;  and,  if  so,  how  is  it  to  be  ascertained?  An 
ordinary  effect  of  large  classes  of  purchases  is  an  inter- 
ference with  competition,  and  to  make  their  validity  de- 
pend upon  whether  that  was  their  motive  or  not  imparts 
an  uncertainty  into  transactions  which  would  seriously 
menace  and  disturb  industrial  conditions.  It  is  quite 
clear  to  me  that  this  act  was  never  intended  to  raise 
such  questions.  It  was  never  intended  to  regulate  or 
affect  the  acquisition  of  property  by  purchase,  whatever 
may  be  the  motive  of  an  exercise  of  the  right.  There 
has  been  so  far  no  interpretation  of  the  act  imputing 
to  it  any  such  intention,  and  in  the  absence  of  such  an 
interpretation  I  feel  justified  in  standing  upon  the 
proposition  as  I  have  formulated  it. 

But  if  this  proposition  be  modified  to  read  that  pur- 
chases for  a  real  and  legitimate  purpose  are  outside  the 
act,  and  purchases  for  the  purpose  of  controlling  or 
suppressing  competition  are  within  it,  I  insist  that  the 
purchase  by  the  Union  Pacific  of  the  interest  in  the 
Southern  Pacific  which  it  owns  was  a  purchase  for  a 
legitimate  purpose  and  not  to  control  or  suppress  com- 
petition. I  submit  that  there  is  no  evidence  in  this  rec- 
ord which  would  for  one  moment  warrant  a  finding 
that  the  motive  or  purpose  of  that  purchase  was  to 
control  or  suppress  competition,  or  to  remove  obnoxious 
conditions  created  by  competition.  I  do  not  recall  any 
evidence  that  it  has  given  to  the  Union  Pacific  any  more 
practical  power  over  transcontinental  rates  than  it  had 
before,  or  tending  to  show  that  it  was  acquired  with 


114 

any  reference  to  the  power  of  rate  making  or  to  any 
other  competitive  condition.  There  is  nothing  in  the 
record  which  would  justify  a  finding  that  the  purpose 
and  intent  of  the  transaction  was  any  other  than  to 
acquire  control  of  the  line  from  Ogden  to  San  Fran- 
cisco for  the  purpose  of  extending  the  Union  Pacific 
system  to  that  point — an  extension  absolutely  and 
vitally  necessary  to  its  efficiency  and  prosperity.  I  say, 
therefore,  that  this  was  a  proper  purchase ;  that  it  was 
a  purchase  for  a  legitimate  purpose  of  the  Union  Pa- 
cific ;  that  it  was  not  a  purchase,  scheme,  or  device  made 
or  entered  into  to  control  or  suppress  competition  or 
restrain  trade ;  and  that  any  interference  with  competi- 
tion which  has  resulted  from  it  is  trivial  in  volume  and 
was  not  the  motive,  cause,  or  purpose  of- the  transaction. 

We  have  now  reached  the  point  that  this  transaction 
is  not  within  the  act  if  it  was  a  purchase,  nor  is  it 
within  the  act  even  if  a  purchase  made  to  suppress 
competition  is  condemned  by  the  act  because  it  was  not 
a  purchase  made  for  that  purpose. 

Commissioner  Lane.  Mr.  Milburn,  the  acquisition  of 
the  Southern  Pacific  stock  was  made  about  the  same 
time  as  the  purchase  of  the  Northern  Pacific  stock,  and 
it  was  expected  by  Mr.  Harriman  undoubtedly  that  he 
would  be  able  to  control  through  the  Union  Pacific  the 
Southern  Pacific  and  the  Northern  Pacific.  Might  that 
not  go  to  the  purpose  for  which  the  purchase  of  the 
Southern  Pacific  stock  was  made  ? 

Mr.  Milburn.  I  do  not  see,  Mr.  Commissioner,  any 
basis  in  the  evidence  for  that  inference  or  for  tying 
together  the  two  transactions.  It  clearly  appears  that 
they  were  separate  and  independent  transactions  and 
that  each  had  its  separate  and  independent  motive. 
The  unquestionable  motive  for  the  purchase  of  the 
Southern  Pacific  was  the  control  of  the  line  from  Ogden 
to  San  Francisco  as  a  necessary  adjunct  to  the  Union 
Pacific  system.  There  has  been  no  inquiry  in  this  in- 
vestigation into  the  reason  for  the  acquisition  of  the 
Northern  Pacific  stock.  Only  the  bare  fact  has  been 
brought  out  that  it  was  acquired  and  later  disposed  of. 


115 

Judge  LovETT.  Mr.  Milburn,  if  you  will  allow  me  a 
suggestion  there 

Mr.  Milburn.  Yes. 

Judge  LovETT.  The  negotiations  for  the  purchase  of 
the  Southern  Pacific  were  pending  before  the -death  of 
Mr.  Huntington,  which  occurred  in  the  year  1900. 
Negotiations  had  been  pending  for  the  purchase  of  the 
Southern  Pacific  long  before  there  was  any  thought  of 
acquiring  an  interest  in  the  Northern  Pacific. 

Commissioner  Lane.  As  I  remember  the  testimony,  it 
was  that  the  issuance  of  the  100  million  dollars  of  con- 
vertible bonds  was  for  the  purpose  primarily  of  ac- 
quiring the  Southern  Pacific  and  Northern  Pacific. 

Mr.  Milburn.  Forty  millions  of  dollars  for  the 
Southern  Pacific. 

Mr.  Kellogg.  Sixty  millions  for  the  Northern  Pacific 
and  40  millions  for  the  Southern  Pacific. 

Mr.  Milburn.  That  is  how  the  proceeds  of  the  bonds 
were  used.  As  Judge  Lovett  says,  the  negotiations  for 
the  purchase  of  the  Union  Pacific  had  been  pending  for 
a  long  time  and  were  consummated  in  the  beginning  of 
1901.  The  purchase  was  financed  through  this  issue  of 
convertible  bonds,  of  which  40  millions  of  dollars  were 
used  for  that  purpose.  Later  60  millions  of  dollars  of 
the  issue  were  used  for  the  purchase  of  the  Northern  Pa- 
cific stock.  That  the  proceeds  of  the  same  issue  of  bonds 
were  used  in  making  these  purchases  is  no  evidence  that 
both  interests  were  to  be  acquired  pursuant  to  a  scheme 
to  control  competition.  The  transactions  were  separate 
and  independent;  there  Avas  no  combination  or  con- 
spiracy; the  purchases  were  made  by  or  on  behalf  of 
the  Union  Pacific  in  the  open  market  in  the  ordinary 
course  of  business;  and  the  record  reveals  a  separate, 
independent,  and  real  reason  for  the  purchase  of  the 
Southern  Pacific  interest  and  one  entirely  disconnected 
'with  the  purchase  of  the  Northern  Pacific  stock.  I  can 
not  see  any  evidence  on  which  the  Commission  can 
predicate  any  other  finding.  The  Southern  Pacific  pur- 
chase stands  on  its  own  reasons  and  is  justified  by  its 
own  facts,  and  it  would  be  unjustifiable  to  affect  it  now 


116 

by  the  hyi^othesis  of  a  vast  scheme  or  dream  which  has 
not  materialized. 

Commissioner  Lajme.  Well,  you  judge  the  purpose 
by  what  was  done? 

Mr.  MiLBURN.  Yes,  sir. 

Commissioner  Lane.  And  at  the  same  time  that  the 
Southern  Pacific  was  acquired — that  is,  not  only  the 
Southern  Pacific  leading  from  Ogden  to  San  Fran- 
cisco, but  the  Southern  Pacific  leading  from  New  Or- 
leans to  San  Francisco  and  Portland — the  Union  Pa- 
cific also  attempted  to  get  possession  of  the  Northern 
Pacific  from  the  Lakes  to  Portland  and  Puget  Sound. 
Is  it  not,  then,  reasonable  to  infer  that  the  purpose  of 
the  Union  Pacific  was  to  get  hold  of  these  three  par- 
allel lines  leading  to  the  Pacific  coast?  Is  not  that 
just  as  reasonable  an  inference  from  the  testimony  we 
have  as  the  inference  you  make  that  the  primary  pur- 
pose was  to  get  a  line  westward  from  Ogden  to  San 
Francisco  and  that  they  only  took  the  Southern  Pa- 
cific leading  from  San  Francisco  around  to  New  Or- 
leans as  incidental  to  the  main  line  leading  westward 
from  Ogden? 

Mr.  MiLBURN.  In  the  first  place,  it  was  not  optional 
with  them  to  take  one  part  of  the  Southern  Pacific  and 
not  another.  They  had  to  buy  the  whole  to  get  the 
part.  In  the  next  place,  it  needs  no  argument  to  show 
that  the  line  from  Ogden  to  San  Francisco  was  indis- 
pensable to  the  Union  Pacific  and  that  no  body  of 
prudent  men  managing  the  Union  Pacific  system 
would  leave  that  line  to  the  Pacific  coast  unacquired, 
particularly  as  it  might  at  any  time  fall  into  adverse 
hands.  So  much  is  plain  and  clear  that  the  men  in 
charge  of  the  Union  Pacific,  realizing  the  age  of  Mr. 
Huntington  and  that  his  holdings  in  the  Southern 
Pacific  might  at  any  time  pass  into  other  hands,  deemed 
it  necessary,  in  the  interest  of  the"  property  in  their 
charge,  to  purchase  a  controlling  interest  in  that  road 
and  secure  the  line  to  San  Francisco.  This  was  de- 
termined upon  long  before  the  purchase  of  the  North- 
ern Pacific  stock  was  mooted,  and  what  I  contend  is 
that  any  finding  on  this  subject  should  be  based  on  the 


117 

real  facts  of  the  situation  and  not  on  the  assumption 
that  it  was  part  of  a  scheme  or  dream  to  control  a 
group  of  transcontinental  lines  which  I  believe  an  in- 
quiry into  the  facts  would  show  never  existed. 

Commissioner  Lane.  Well,  that  dream  would  not 
originate  if  that  finding  were  made  by  the  Commis- 
sion in  the  minds  of  the  Commission.  It  originated  in 
the  mind  of  Mr.  Harriman  when,  he  bought  the  North- 
ern Pacific  and  failed  because  he  found  that  the  pre- 
ferred stock  did  not  give  him  control. 

Mr.  MiLBURN.  No;  what  I  am  saying  is  that  there 
is  nothing  before  you  to  connect  the  purpose  in  nego- 
tiating with  Mr.  Huntington  for  the  Southern  Pacific 
stock  in  1900  and  in  acquiring  that  system  with  any 
purpose  or  intention  he  may  have  had  long  after  with 
respect  to  the  Northern  Pacific.  I  am  not  concerned 
with  what  his  purpose  was  in  purchasing  the  Northern 
Pacific  stock  in  1901,  because  that  question  is  not  here, 
no  inquiry  having  been  made  with  respect  to  it.  What 
I  am  concerned  with  is  the  situation  when  the  South- 
ern Pacific  stock  was  acquired,  and  what  the  purpose 
was  in  acquiring  it,  and  I  insist  that  the  plain  purpose 
and  intent  was  to  secure  for  the  Union  Pacific  a  line 
from  Ogden  to  San  Francisco  which  it  could  control 
as  against  any  adverse  interest.  That  is  my  deliber- 
ate view  of  the  matter,  and  it  is  to  be  borne  in  mind 
that  the  purpose  or  intent  is  important  only  if  a  pur- 
chase with  an  intent  to  affect  competition  is  by  reason 
of  such  intent  invalidated  by  the  Sherman  Act,  a 
view  of  the  act  which  is  in  my  judgment  utterly  un- 
tenable. 

I  now  come  to  another  proposition,  which  is  that  the 
Union  Pacific  and  Southern  Pacific  are  not  parallel 
and  competing,  or  competing,  systems  of  railway  within 
any  reasonable  definition  of  what  constitutes  competing 
railway  systems  that  can  be  framed. 

I  draw  one  line  in  my  mind  from  Council  Bluffs, 
Omaha,  or  Kansas  City  to  Ogden,  and  thence  running 
northwesterly  to  Portland.  I  draw  another  from  Port- 
land, through  San  Francisco  and  Los  Angeles  to  New 
Orleans,  and  thence  by  water  to  New  York.     I  say  that 


118 

those  two  lines  are  not  competing  lines  within  any 
meaning  that  has  ever  been  attributed  to  those  terms  or 
that  ever  will  be  attributed  to  them.  Compare  with 
them  the  Great  Northern  and  Northern  Pacific  systems 
extending  along  parallel  lines  from  the  Great  Lakes  to 
the  Pacific  coast  in  such  close  proximitj'  to  each  other 
that  they  particularly  drain  the  same  regions.  The 
contrast  is  so  apparent  and  so  radical  that  so  far  as 
competitive  conditions  are  concerned  there  is  no  identity 
or  analogy  between  the  relations  of  the  Union  Pacific 
to  the  Soutiiem  Pacific  and  the  relations  of  the  Great 
Northern  to  the  Northern  Pacific.  The  Great  Northern 
and  Northern  Pacific  are  clearly  in  the  category  of  com- 
peting lines;  the  Union  Pacific  and  Southern  Pacific 
are  not,  unless  all  railroads  are  deemed  to  be  competi- 
tive regardless  of  their  geographical  location. 

We  are  now  evidently  reaching  the  time  when  an 
authoritative  definition  of  what  are  competing  railway 
lines  will  have  to  be  formulated.  There  is  at  present 
little  light  on  the  subject  to  be  obtained  from  authority. 
Experience  is  more  fertile  in  its  suggestions.  For  over 
fifty  years  railroads  have  been  consolidating  with  each 
other  and  leasing  each  other's  lines  under  the  authority 
of  legislation,  and  the  only  limitation  on  the  process 
that  has  developed  is  that  parallel  lines  shall  not  be  con- 
solidated or  otherwise  united.  The  suggestion  of  its 
legislation  and  experience  is  that  the  competition  which 
ihe  law  has  safeguarded  is  the  competition  between 
parallel  lines,  and  that  railroads  are  only  competitive 
in  the  eye  of  the  law  when  they  are  parallel.  Applying 
this  test,  the  Union  Pacific  and  Southern  Pacific  lines  or 
systems  can  not  be  designated  as  parallel  lines  or  systems 
with  any  regard  to  the  real  meaning  of  the  term. 
Parallel  lines  are  lines  that  run  side  by  side,  north  and 
south,  or  east  and  west,  sufficiently  near  to  each  other 
to  drain  or  serve  the  same  territory.  They  are  not 
parallel  lines  if  they  are  too  remote  from  each  other  to 
do  so,  or  if  they  run  in  distinctly  different  directions. 
In  no  sense  is  a  railroad  running  from  Portland  to 
Ogden,  and  thence  to  Omaha,  parallel  with  a  railroad 
running  from  Portland  to  San  Francisco,  and  thence  to 


119 

New  Orleans.  Hence,  if  competing  railroads  are,  as  a 
matter  of  legal  definition,  substantially  parallel  rail- 
roads the  Union  Pacific  and  Southern  Pacific  are  clearly 
not  in  that  category. 

But  to  broaden  the  discussion  somewhat  I  submit  that 
railroads  are  onh^  competitive  as  to  any  traffic  when 
they  can  take  it  at  the  point  where  it  originates  and  put 
it  on  their  roads.  The  railroads  with  terminals  at 
New  York  and  Jersey  City  are  competitors  for  west- 
bound traffic  originating  at  the  port  of  New  York  be- 
cause they  can  take  it  at  those  points,  issue  bills  of 
lading  for  it,  and  put  it  onto  their  roads  there.  If  this 
be  the  true  view  the  Union  Pacific  and  Southern  Pacific 
are  not  competitors  excepting  with  respect  to  trans- 
continental eastbound  traffic  originating  at  Pcfrtland, 
and  as  Judge  Lovett  has  shown  that  is  an  infinitesimal 
quantity  by  reason  of  the  fact  that  the  Southern  Pa- 
cific's route  from  Portland  over  two  mountain  ranges  to 
San  Francisco,  thence  to  Xew  Orleans,  and  thence  by 
water  to  Xew  York  is  impracticable  as  compared  with 
the  Union  Pacific's  route  from  Portland  to  Ogden  and 
thence  east.  Starting  at  Omaha,  Council  Bluffs,  or 
Kansas  City  the  Union  Pacific  is  not  a  competitive  line 
with  the  Southern  Pacific  for  westbound  traffic,  whether 
we  regard  the  latter  as  starting  at  Xew  York  with  its 
steamship  line  or  at  Xew  Orleans  with  its  railroad, 
for  the  reason  that  the  traffic  over  the  former  so 
far  as  it  is  concerned  originates  at  Omaha,  Council 
Bluffs,  or  Kansas  City,  whereas  the  traffic  over  the 
Southern  Pacific  originates  so  far  as  it  is  concerned 
either  at  Xew  York  or  Xew  Orleans.  They  have  no 
common  point  where  they  each  take  westbound  freight 
onto  their  roads  or  lines,  and  no  such  point  within  a 
thousand  miles  of  each  other.  Can  it  reasonably  be 
argued  that  they  are  competitive  lines  because  the  same 
freight  may  on  its  way  from  east  to  west,  or  west  to 
east,  go  over  either  line  or  some  portion  of  it?  Are 
they  competitive  lines  because  freight  originating  in 
Xew  York  destined  for  San  Francisco  or  the  Orient 
may  go  by  the  Southern  Pacific,  by  sea  to  Galveston  or 
Xew  Orleans,  and  thence  by  railroad  to  San  Francisco, 


120 

or  by  an  all-rail  transcontinental  line  of  which  the 
Union  Pacific  from  Omaha  to  Ogden  is  simply  one 
link?  Are  they  competitive  lines  with  respect  to  such 
freight  Avhen  the  first  contact  of  the  Union  Pacific 
with  it  is  at  Omaha,  more  than  1,500  miles  from  the 
point  of  origin  where  the  Southern  Pacific  would  take 
it?  If  so,  then  every  railroad  in  the  United  States  is 
competitive  with  every  other  railroad  because  it  is  in- 
conceivable that  some  freight  might  not,  taking  one 
route  pass  over  one  of  them  or  part  of  it,  or  taking 
another  route  pass  over  the  other  or  part  of  it.  I  do 
not  think  that  such  conditions  determine  whether  rail- 
roads are  competitive  or  not. 

But  assuming  for  a  moment  that  the  Union  Pacific 
and  Southern  Pacific  might  be  deemed  under  ordinary 
conditions  to  be  competitive  with  respect  to  transcon- 
tinental traffic,  because  one  with  its  ships  and  railroad 
is  a  through  transcontinental  line,  and  the  other  is 
a  link  in  various  lines  from  the  Atlantic  seaboard  to 
San  Francisco,  they  can  not  be  so  regarded  in  view  of 
the  fact  that  the  Southern  Pacific  with  its  line  from 
Ogden  to  San  Francisco  is  also  a  link  in  the  same 
through  lines  of  which  the  Union  Pacific  is  a  link. 
No  such  through  line  could  be  made  without  the  con- 
sent of  the  Southern  Pacific;  no  through  rate  could 
exist  without  its  participation;  and  in  every  such  line 
it  would,  because  of  its  position,  be  not  only  an  essen- 
tial but  a  dominating  element.  How  could  a  line  made 
up,  say  of  the  New  York  Central,  Lake  Shore,  Chicago, 
Burlington  &  Quincj^,  the  Union  Pacific  and  the  South- 
ern Pacific  be  really  competitive  with  the  Southern 
Pacific's  through  route  via  New  Orleans  or  Galveston 
when  the  existence  of  the  former  as  a  through  line  with 
through  rates  is  dependent  upon  the  cooperation  of 
the  Southern  Pacific  by  reason  of  its  ownership  of  the 
railroad  from  Ogden  to  San  Francisco?  The  acquisi- 
tion of  the  Southern  Pacific  by  the  Union  Pacific  makes 
those  lines  no  more  and  no  less  competitive  than  they 
were  before.  The  possibilities  of  competition  are  just 
the  same  between  any  such  line  and  the  through  line 
of  the  Southern  Pacific  whether  they  continue  separate 


121 

companies  or  either  owns  the  other.  From  no  point  of 
view  can  I  regard  the  Southern  Pacific  and  the  Union 
Pacific  as  competitive  systems. 

I  have  now,  though  very  imperfectly,  covered  the 
question  of  the  bearing  of  the  Sherman  Act  on  the 
validity  of  the  acquisition  by  the  Union  Pacific  of  the 
interest  in  the  Southern  Pacific,  which  it  owns.  Much 
more  could  be  said,  and  indeed  all  I  have  attempted  to 
do  is  to  outline  what  I  may  call  our  fundamental  posi- 
tions. I  feel  that  this  is  a  matter  deserving  of  most 
serious  consideration  at  your  hands.  The  purchase  was 
made  in  1901,  and  it  has  been  a  matter  of  record  in  the 
annual  reports  filed  with  the  Commission  ever  since. 
These  two  systems  have  been  ever  since  operated  as  a 
unit.  They  have  been  developed  into  one  of  the  great 
railroad  systems  of  the  country,  and  securities  to  a  very 
large  amount  have  been  issued  and  marketed  on  the 
faith  of  that  unity  as  an  existing  and  permanent  fact. 
More  than  250  millions  of  dollars  have  been  spent  on 
their  improvement  and  development.  I  could  ask  noth- 
ing better  than  that  you  have  your  statistician  compile 
from  the  reports  of  the  entire  system  the  data  which 
would  show  what  has  been  accomplished  for  the  public 
convenience  and  good  during  the  last  seven  or  eight 
years,  and  compare  the  results  with  those  of  any  other 
system  in  that  vast  region  of  our  country. 

Commissioner  Clements.  Mr.  Milburn,  is  it  your 
contention  that  no  matter  what  may  be  the  effect  of  a 
transaction  of  this  kind  with  regard  to  restraint  of 
trade  or  competition  that  it  is  without  the  provisions 
of  this  act  if  its  intent  is  something  other  than  to 
restrain  trade? 

Mr.  MiLiiURN.  Yes;  my  position  is  that  as  it  was  a 
real  purchase  any  restraint  of  trade  is  incidental  and 
immaterial. 

Commissioner  Clements.  No  matter  what  the  effect 
is  and  no  matter  what  the  motive  is? 

Mr.  Milburn.  Yes,  sir;  just  as  if  one  manufacturing 
concern  bought  the  plants  of  four  or  five  others  in 
competition  with  it  to  extend  its  own  business  and  be 
relie^ved  from  that  competition. 


122 

Commissioner  Clements.  If  you  buy  them  with  in- 
tent to  suppress  competition  and  if  it  does  suj)press 
competition  and  does  create  a  monopoly 

Mr,  MiLBURN.  That  goes  a  little  further,  sir. 

Commissioner  Clements.  Well,  that  is  a  part  of  this 
act. 

Mr.  MiLBURN.  I  know. 

Commissioner  Clements.  I  am  just  asking  to  see 
where  your  conclusion  would  go. 

Mr.  MiLBURN.  But  there  is  a  difference  between 
restraint  of  trade  and  monopoly.  I  have  not  been 
discussing  the  subject  from  the  point  of  view  of  mo- 
nopoly.    I  do  not  see  any  question  of  monopoly  here. 

Commissioner  Clements.  Well,  your  idea  then  is 
that  no  matter  how  plainly  the  intent  is  to  restrain 
trade,  no  matter  how  effectually  it  does  restrain  trade, 
if  it  is  done  through  a  purchase  it  is  not  illegal. 

Mr.  MiLBURN.  That  is  my  contention.  I  will  put  it 
in  this  way.  There  has  been  no  interpretation  as  yet 
of  the  Sherman  Act  which  makes  a  purchase  with  that 
intent  illegal,  and  if  there  ever  should  be  such  an  in- 
terpretation I  would  like  to  know  what  will  become  of 
the  industrial  organizations  of  this  country.  We  all 
know  about  them  and  that  every  one  of  them  had  that 
as  one  of  its  purposes.  Perhaps  the  main  purpose  of 
most  of  them  was  to  amalgamate  the  concerns  ac- 
quired to  get  rid  of  competition.  If  that  be  ever  held 
by  the  Supreme  Court  to  be  in  violation  of  the  Sher- 
man Act  there  will  be  a  nice  tumbling  down  of  things. 
I  don't  believe  it  will  ever  hold  any  such  doctrine. 

Commissioner  Clements.  If  you  have  in  view  what 
appears  to  be  the  purpose  of  that  act,  to  maintain  free- 
dom of  trade,  and  to  that  end  prevent  restraint  and 
suppression  of  competition,  what  difference  does  it 
make  to  the  public  how  it  is  effected?  Isn't  the  effect 
the  only  test  of  the  validity  of  the  transaction  ? 

Mr.  MiLBURN.  Well,  Mr.  Commissioner,  the  view  I 
take  is  this :  Business  exists  by  reason  of  various  activ- 
ities and  conditions.  Competition  is  one  form  of  ac- 
tivity.    The  acquisition  of  property  is  another.     The 


123 

acquisition  of  property  is  a  constant  interference  with 
competition.  We  can  not  have  unrestrained  and  un- 
limited competition  unless  the  right  of  acquisition  is 
cut  down  to  a  degree  that  will  destroy  or  at  any  rate 
seriously  impair  our  industrial  and  commercial  sys- 
tem. There  are  two  men  in  a  village  each  running  a 
forge.  There  is  not  enough  business  for  both,  and  both 
are  doing  badly.  One  buys  the  other  out  and  then 
asks  a  little  more  for  his  work  and  gets  along.  That 
is  a  purchase;  it  suppresses  competition;  and  that  sup- 
pression is  the  purpose  of  it.  Is  the  transaction  illegal 
because  in  restraint  of  trade?  Unlimited  competition 
can  not  coexist  with  the  right  of  acquisition  by  pur- 
chase. To  fix  the  extent  to  which  the  right  to  buy 
property  should  be  restricted  in  the  interest  of  compe- 
tition would  be  a  very  difficult  piece  of  legislation. 
My  view  is  that  the  Sherman  Act  did  not  attempt  to 
solve  that  problem.  It  did  not  meddle  with  the  right 
to  buy  and  acquire  property.  It  was  satisfied  to  reach 
out  and  condemn  contracts,  combinations,  and  con- 
spiracies to  restrict  production,  to  fix  prices,  and  to 
suppress  competition  in  other  directions.  That  was  a 
great  deal  to  do  and  about  as  much  as  could  be  accom- 
plished. It  did  not  seek  to  legislate  us  either  into  the 
millenium  or  chaos. 

Commissioner  Clements.  It  says  "  in  restraint  of 
trade,"  not  "  made  with  intent  to  restrain  trade." 

Mr.  MiLBURx.  I  do  not  think  it  makes  any  diflference 
whether  there  is  or  is  not  actual  restraint  if  a  contract, 
combination,  or  conspiracy  is  one  which  regulates,  fixes, 
or  maintains  rates,  prices,  or  production.  That  is  what 
was  held  in  the  Trans-Missouri  Freight  Association 
Case  (166  U.S.,  p.  290). 

Commissioner  Clements.  The  effect  there  was  to 
place  the  power  in  the  association  to  restrain  trade. 

Connnissioner  Harlan.  I  was  just  going  to  say  your 
doctrine  applied  to  the  Northern  Pacific  case  means 
this:  That  if  the  same  interests  that  effected  the  or- 
ganization in  the  Northern  Securities  case  had  effected 
the   purchase  of  the   Northern   Pacific  by   the  Great 


124 

Northern  it  would  not  have  been  within  this  act,  though 
the  same  results  would  have  been  accomplished  so  far 
as  restrictions  of  competition  are  concerned, 

Mr.  MiLBURN.  Judge  Brewer  said  in  the  Northern 
Securities  case  that  if  an  individual  had  resources 
enough  to  buy  the  control  of  both  roads  there  was  no 
law  to  prevent  him  doing  so.  He  could  do  so  in  the 
exercise  of  his  right  to  buy  and  acquire  property,  and 
the  effect  upon  competition  would  cut  no  figure  at  all. 
That  power  therefore  exists  consistently  with  what  was 
held  in  the  Northern  Securities  case. 

Commissioner  Clements.  If  one  of  these  transcon- 
tinental lines — for  instance,  the  Union  Pacific — should 
effect  various  reorganizations  and  purchases  of  stock, 
and  acquire  the  means  by  which  to  do  it  by  bonds  or 
otherwise,  and  get  control  of  the  majority  of  the  stock 
of  each  of  these  transcontinental  lines,  would  it  not  be 
offensive  to  this  law? 

Mr.  MiLBURN.  It  would  not  offend  the  Sherman  Act 
for  the  Union  Pacific  to  purchase  the  stock  of  any  rail- 
road company  which  it  is  authorized  by  its  charter  to 
purchase  and  which  is  not  prohibited  by  the  law  of  any 
State  binding  upon  it  and  the  company  whose  stock  it 
proposed  to  acquire.  The  prohibitions  of  State  laws 
must  not  be  overlooked.  I  have  already  refeiTed  to  the 
Pearsall  case,  which  held  the  attempted  acquisition  of 
an  interest  in  the  Northern  Pacific  by  the  Great  Northern 
to  be  contrary  to  the  laws  of  the  State  of  Minnesota. 
Probably  any  such  sweeping  scheme  as  is  indicated  in 
the  inquiry  of  the  Commissioner  would  find  itself 
blocked  by  State  laws.  Moreover,  the  question  is  what 
the  present  Sherman  Act  prohibits,  not  what  should  be 
prohibited.  I  have  argued  that  it  does  not  extend  to 
acquisitions  of  property  by  purchase,  and  that  whatever 
may  be  accomplished  through  the  exercise  of  that  power 
is  unassailable  so  far  as  that  act  is  concerned.  AVhether 
the  act  should  be  extended  to  cover  purchases  is  a  po- 
litical, not  a  legal,  question.  There  is  a  widespread 
feeling  that  it  is  already  too  radical  in  its  provisions. 
But  whether  it  should  be  ext^ded  or  limited  in  its 


125 

scope  is  a  question  of  policy  which  concerns  the  future 
and  does  not  affect  what  has  been  done. 

I  can  not  close  without  repeating  what  I  said  in  open- 
ing. I  notice  from  the  language  of  the  resolution 
under  which  this  investigation  has  proceeded  that  it 
directs  an  inquiry  into  the  whole  subject  of  the  effect 
of  the  control  of  railroads  by  other  railroads  through 
stock,  ownership,  community  of  interest,  or  otherwise. 
I  feel  very  strongly  that  the  Union  Pacific  should  not 
be  singled  out  for  exclusive  consideration.  I  submit 
that  your  inquiry  and  report  should  cover  the  whole 
subject.  The  Pennsylvania  system,  the  Vanderbilt 
system,  the  Northern  Pacific  system,  the  Rock  Island 
system,  the  Great  Xorthern  system,  are  all  made  up 
by  consolidations,  acquisitions,  and  control  in  various 
forms  of  competing  lines.  That  is  a  process  that  has 
been  going  on  for  years  and  years.  It  was  going  on 
when  the  interstate-commerce  act  and  the  Sherman  Act 
were  enacted ;  it  has  been  going  on  under  the  eyes  of 
this  Commission  ever  since.  The  growth  of  these  sys- 
tems has  been  known  of  all  men;  it  has  been  recorded 
year  by  year  in  the  files  of  this  Commission.  If  there 
is  to  be  now  inaugurated  a  policy  of  dismemberment  let 
it  be  a  policy  affecting  all  concerned,  and  not  a  single 
interest.  I  do  not  believe  at  all  in  a  policy  of  dismem- 
berment, in  a  policy  of  disruption.  These  great  sys- 
tems have  been  and  are  a  great  public  benefit;  they 
have  many  points  in  their  favor  if  they  have  some  dis- 
advantages. They  are  the  only  means  by  which  the 
vast  sums  of  money  can  be  raised  that  are  necessary  to 
keep  the  railroads  of  the  country  at  all  adequate  to  the 
needs  of  the  people.  There  is  an  enormous  demand  for 
railroad  expansion  and  improvement  in  every  direc- 
tion ;  it  is  a  demand  that  is  constantly  increasing ;  and 
small  roads  and  small  systems  can  not  secure  the  capital 
necessary  to  meet  it.  The  larger  these  systems  are  the 
greater  the  efficiency  of  their  service  and  facilities  if 
they  are  well  managed  and  operated.  A  few  great  sys- 
tems furnish  a  much  more  prompt,  adequate,  and 
economical  railway  service  than  a  mass  of  little  inde- 


126 

pendent  roads  or  systems,  half  of  them  in  financial 
trouble,  and  all  of  them  hampered  and  crippled  in 
securing  the  means  to  grow  with  the  growth  and  de- 
velopment of  the  country.  I  see  no  more  occasion  for 
alarm  in  the  mere  size  of  railway  systems  than  in  the 
size  of  the  United  States  itself,  of  which  we  are  so 
boastful.  The  people  of  a  country  so  big,  so  rich,  so 
unlimited  in  its  resources,  so  rapid  in  the  growth  of 
its  wealth  and  population,  need  not  be  afraid  of  the 
size  of  its  industrial  or  transportation  agencies,  with 
governmental  regulation  and  control  ever  present  and 
active.  I  am  addressing  a  body  which  is  invested  with 
the  power  to  fix  reasonable  rates  for  railway  service,  to 
make  through  rates  and  joint  rates,  to  prevent  discrimi- 
nations, to  prevent  rebates  and  concessions  of  every 
kind,  and  not  only  to  search  every  nook  and  comer  of 
every  railroad  office  in  the  United  States  to  find  out 
whether  the  law  is  being  observed,  but  to  order  at  any 
time  the  officials  of  any  and  every  railroad  before  it  to 
render  an  account  of  their  stewardship.  If  the  poli- 
ticians will  only  let  the  railroads  alone  for  a  few  years 
and  allow  this  Commission  to  exercise  in  calmness  its 
great  powers,  I  have  no  doubt  that  most  of  the  problems 
now  agitating  the  public  mind  will  be  worked  out  and 
solved.  Armed  with  such  powers  as  you  have  there  is 
nothing  to  be  feared  from  the  organization  of  the  rail- 
roads of  the  country  into  great  systems,  and  much  to 
be  gained  from  what  they  are  able  to  accomplish  for 
the  public  good.  I  ask  the  Commission,  in  the  exer- 
cise of  its  important  functions,  to  go  slow  in  the  dis- 
ruption of  the  existing  railway  systems.  And  I  ask 
the  Commission,  in  the  interest  of  fair  play  and  justice, 
if  it  is  going  to  embark  on  a  policy  of  disruption,  not 
to  select  any  particular  system  for  attack  but  to  treat 
all  alike,  and  with  that  final  request  I  close  and  thank 
you  for  your  attention. 

Commissioner  Lane.  Mr.  Milburn,  before  you  sit 
down,  let  me  draw  your  attention  to  the  fact  that  Mr. 
Harriman,  in  his  testimony,  said  that  were  it  not  for 
the  restraint  of  the  law  he  would  have  taken,  or  he 
would  take  to-morrow,  the  Santa  Fe,  and  he  evinced  a 


127 

desire  to  get  the  Northern  Pacific.  Now,  supposing  he 
had  the  Southern  Pacific,  and  the  Santa  Fe,  the  Union 
Pacific,  the  Central  Pacific,  the  Northern  Pacific,  and 
the  control  of  the  Illinois  Central,  if  j^ou  please,  he 
would  have  control  of  all  the  lines  leading  into  Oregon 
and  California  and  the  main  Pacific  coast  ports,  except- 
ing Puget  Sound.  Now,  he  acknowledges  it  was  the 
restraint  of  the  law  that  kept  him  from  effecting  that 
purpose. 

Mr.  MiLBiKN.  Mr.  Commissioner,  I  do  not  think  you 
should  lay  too  much  stress  on  a  sweeping  remark  of 
that  kind  made  by  a  vritness.  Mr.  Harriman  was  not 
referring  to  an  actual  programme;  he  was  expressing 
an  ideal  that  he  has  in  his  mind  which  I  personally  do 
not  think  can  ever  be  carried  out  except  through  gov- 
ernmental ownership — from  which  God  save  us.  That 
ideal  is  that  if  all  these  roads  were  operated  in  har- 
mony they  could  be  improved  as  they  should  be  im- 
proved, the  traffic  could  be  distributed  as  it  should  be 
distributed,  one  road  could  be  used  for  one  kind  of 
traffic  to  which  it  is  adapted  and  another  road  for  an- 
other kind  of  traffic  to  which  it  is  adapted,  rolling  stock 
would  be  moved  over  all  the  roads  without  delay, 
obstruction,  and  detention,  and  generally  transportation 
under  these  conditions  would  be  more  efficient,  more 
rapid,  and  less  costly.  It  was,  I  repeat,  the  expression 
of  an  ideal  and  not  of  an  actual  undertaking  in  the 
carrying  out  of  which  he  was  thwarted  by  the  law. 

Commissioner  Lane.  Now,  you  made  a  very  impas- 
sioned and  impressive  appeal  to  the  Commission,  an 
appeal  to  the  Government,  not  to  go  too  far.  I  want 
to  direct  your  attention  to  the  fact  that  it  is  only  by 
going  as  far  as  the  Government  has  that  certain  people 
have  been  kept  from  going  farther  than  they  have. 

Mr.  MiLBURN.  I  suppose  you  mean  by  that  the  North- 
ern Securities  case. 

Commissioner  Lane.  I  mean  that  the  policy  of  acqui- 
sition has  not  been  carried  as  far  as  it  might  have  been 
carried,  because  it  was  "  Hands  on  "  instead  of  "  Hands 
off ;  "  because  the  law  did  exercise  its  restraining  power. 
Your  appeal  is  that  the  Government  shall  keep  its 
3568—07  M 9 


128 

hands  oflf.  I  am  familiar  with  the  economic  principle, 
but  isn't  it  one  that  can  be  carried  too  far? 

Mr.  MiLBURN.  I  have  not  intended  to  argue  that  any 
backward  steps  should  be  taken.  I  am  opposing  dis- 
memberment along  new  lines  and  on  forced  and  strained 
constructions  of  the  existing  law.  The  Northern  Se- 
curities case  has  prevented  combinations  of  the  kind 
there  involved.  The  law  of  that  case  is  loyally  ac- 
cepted. What  I  am  objecting  to  is  another  and  more 
radical  interpretation.  The  existing  railway  systems 
are  not  in  my  judgment  within  the  rule  or  principle 
of  that  case.  There  are  eight  or  nine  of  them  that  have 
been  compacted  by  consolidations,  by  leases,  and  by 
stock  ownership.  I  do  not  believe  in  the  dismember- 
ment of  those  systems,  because  they  have  been,  as  I 
believe,  legally  put  together,  and  the  law  should  not  be 
strained  to  make  them  illegal.  They  have  grown  up, 
they  have  been  recognized  by  the  Government,  they 
have  been  sanctioned,  as  it  were,  by  all  these  years  and 
years  of  acquiescence. 

Commissioner  Lane.  Do  you  not  think,  even  if  those 
were  contrary  to  law,  that  there  might  be  a  statute  of 
limitations  that  would  run  in  their  favor,  and  that 
combinations  of  that  kind  that  had  existed  for  many 
years  and  been  recognized  before  the  sentiment  of 
which  Mr.  Cravath  spoke  was  developed  should  con- 
tinue as  they  are? 

Mr.  MiLBURN.  I  would  say.  as  President  Lincoln  said 
of  the  statute  of  limitations  in  politics,  that  it  should 
be  a  very  short  one. 

Mr.  Severance.  You  have  six  years;  make  it  less 
than  six  years. 

Mr.  MiLBURN.  We  have  six  years  behind  us,  so  I  will 
stipulate  for  a  statute  of  six  years. 

ARGUMENT  OF  C.   A.   SEVERANCE. 

May  it  please  the  Commissioners.  I  want  to  submit  a 
few  observations  upon  this  record  and  upon  the  legal 
positions  that  have  been  assumed  by  the  learned  gentle- 
man who  preceded  me. 


129 

I  think  if  the  ar^iment  is  reduced  to  its  ultimate  it 
will  be  found  that  two  propositions  are  advanced : 

First,  that  the  Sherman  law,  so  called,  is  inapplicable 
to  such  a  situation  as  is  presented  here,  by  reason  of 
the  fact  that  the  acquisition  of  the  control  of  the  South- 
em  Pacific  by  the  Union  Pacific  is  by  way  of  purchase, 
rather  than  through  such  a  combination  as  was  evi- 
denced in  the  Trans-Missouri  case  or  in  the  Xorthern 
Securities  case. 

And.  secondly,  that  even  if  the  law  be  construed  so 
as  to  prohibit  the  acquisition  of  this  control  by  pur- 
chase, that  the  lines  were  not  competitive  within  the 
meaning  of  the  law  and  therefore  not  within  the  scope 
of  the  act. 

I  am  unable  to  agree  with  my  friends  upon  either  of 
these  propositions.  Upon  the  first,  which  Mr.  Milburn 
has  referred  to  as  his  fundamental  proposition,  namely, 
that  the  Sherman  law  should  not  be,  would  not  be,  and 
can  not  be  construed  to  prevent  the  purchase  of  a  com- 
petitive railroad  by  another  road,  he  has  strangely  over- 
looked the  fact  that  the  specific  question  which  he  is 
arguing  here  has  already  been  presented  and  decided  by 
the  Supreme  Court  of  the  United  States,  in  a  case  in 
which  his  client,  Mr.  Harriman,  and  the  Oregon  Short 
Line  were  parties. 

That  the  purpose  of  the  Sherman  law  was  to  prevent 
railroad  combinations  does  not  seem  to  be  seriously  dis- 
puted. It  can  not  be  controverted,  in  view  of  the  deci- 
sion in  the  Trans-Missouri  case,  which  has  been  affirmed 
every  time  the  court  has  had  occasion  to  mention  it. 

The  Commission  will  recall  that  in  that  case  it  was 
urged  very  strongly  by  the  representatives  of  the  rail- 
roads that  the  interstate  commerce  act  alone  was  in- 
tended to  be  applied  to  the  railroads  and  that  the  Sher- 
man Act,  so-called,  had  no  application.  But  the  Su- 
preme Court  overruled  that  contention  and  broke  up 
the  freight  association  which  was  questioned  in  that 
case.  That  ruling  was  aifirmed  in  the  Joint  Traffic  case, 
and  it  was  specifically  affirmed  not  only  in  the  majority 


130 

opinion  of  Mr.  Justice  Harlan  in  the  Northern  Securi- 
ties case,  but  in  the  dissenting  opinion  of  Mr.  Justice 
Holmes,  in  which  he  stated  that  he  fully  adhered  to  and 
gave  credit  to  the  ruling  there  laid  down. 

So  it  can  not  be  disputed  that  the  Sherman  Act  is  ap- 
plicable to  railroads,  if  a  proper  case  is  presented,  under 
the  act. 

In  the  second  place,  it  is  not  essential,  as  seems  to  be 
assumed  by  my  friends,  that  a  road  should  be  parallel 
as  well  as  competing.  If  you  will  examine  the  con- 
stitutions and  statutes  of  the  States  which  deal  with  the 
question  of  the  amalgamation  of  parallel  or  competing 
roads,  you  will  find  that  in  almost  eA'^ery  instance  the 
words  are  used  in  the  alternative.  They  are  "  parallel 
or  competing,"  not  "  parallel  and  competing."  The 
construction  of  those  constitutions  and  those  statutes 
have  all  been  in  that  way.  That  is  to  say,  it  is  the  evil 
aimed  at  which  the  courts  consider  and  not  the  question 
whether  the  two  lines  may  lie  side  hj  side  or  one  of 
them  may  go  around.  They  must  be  parallel  or  com- 
peting, not  necessarily  parallel  and  competing. 

That  was  decided  in  the  case  of  the  State  i\  Vander- 
bilt  (37  Ohio  State,  p.  590),  and  that  case  was  cited 
with  approval,  and  a  considerable  quotation  was  made 
from  it  in  the  case  of  the  Louisville  &  Nashville  against 
Kentucky  in  161  U.  S.,  at  page  677. 

The  facts  in  that  case  were  these:  Two  lines  of  rail- 
road, the  Cincinnati,  Hamilton,  and  Dayton  and  an- 
other, started  from  Cincinnati  and  moved  north.  One 
of  them  ran  to  Cleveland  and  the  other  ran  to  Toledo; 
but  by  virtue  of  the  fact  that  they  both  reached  Lake 
Erie,  the  rates  between  these  lines  and  their  connections 
were  so  adjusted  that  freight  would  move  over  either 
line  to  various  points  in  the  West  and  to  the  Atlantic 
seaboard,  for  the  same  rate.  They  were  held  to  be  com- 
petitive lines,  and  of  course  there  can  be  no  question 
that  that  was  the  correct  ruling. 

Again,  in  a  case  which  arose  in  the  imperial  State  of 
Texas,  from  which  my  friend  Judge  Lovett  comes,  the 
same  ruling  was  applied  in  the  case  of  the  East  Line 
and  Red  River  v.  The  State,  reported  in  12  Southwestern 


131 

Reporter,  page  690.  The  court  decided  that  two  roads 
not  parallel  and  not  competing  except  through  their 
connections  were  within  the  prohibition  of  such  a  con- 
stitutional provision.  The  court  adopted  the  findings 
of  the  lower  court,  one  of  which  was  as  follows : 

"  Disregarding  their  connections  with  other  railroads 
and  lines  of  transportation.  The  East  Line  and  Red 
River  and  the  Missouri,  Kansas  &  Texas  railroads  were 
not  competing  roads  when  said  sale  was  made.  Con- 
sidered with  reference  to  such  connections,  they  were 
competing  roads." 

And  the  Supreme  Court  said : 

"  We  further  concur  with  the  court  below  in  holding 
that  railways  by  reason  of  their  relations,  control,  or 
management  of  other  lines  than  their  own,  may  become, 
within  the  meaning  of  the  law,  competing  lines,  though 
the  railroads  owned  by  them  may  not  in  fact  connect." 

So  I  think  we  may  regard  the  proposition  as  estab- 
lished, and  it  is  common  sense  that  it  is  immaterial 
whether  the  railroads,  which  were  or  are  competitors 
of  each  other  by  reason  of  their  relations  with  other 
lines  which  bring  them  traffic,  are  parallel  or  not. 

It  is  an  immaterial  circumstance  here  that  the  Union 
Pacific  goes  directly  west  from  the  Missouri  River,  and 
the  Southern  Pacific  goes  from  New  Orleans  around  to 
Portland  by  the  route  that  it  does  take,  if  by  reason  of 
their  connections  and  the  traffic  that  comes  to  those 
lines  they  are  naturally  and  actually  competitiv^e  lines. 

Counsel  read  to  the  Commission  on  j^esterday  cer- 
tain Federal  statutes  relating  to  the  Union  Pacific  and 
the  Central  Pacific  lines,  but  they  do  not  aid  his  con- 
tention. In  the  first  place,  between  the  time  that  those 
statutes  were  passed  and  the  time  the  Southern  Pacific 
stock  was  purchased  by  the  Union  Pacific,  the  Sherman 
law  had  intervened. 

Under  the  rule  specifically  laid  down  in  the  case  of 
Pearsall  against  the  Great  Northern  (161  U.  S.,  at  p. 
646),  it  was  held  that  any  right  to  do  those  things 
which  would  have  constituted  a  monopoly  and  which 
would  have  been  in  restraint  of  trade,  which  had  been 
granted  originally  and  had  not  been  exercised,  could  be 
taken  away  and  the  law  could  interfere. 


132 

But  further  than  that,  there  is  a  much  better  reason 
why  those  statutes  do  not  aid  his  contention,  lying  in 
the  fact  that  the  statutes  themselves  command  these 
roads  to  be  operated  as  continuous  lines  under  penalties. 

Again,  Mr.  Milburn's  argument  is  largely  and,  in 
fact,  almost  wholly  based  upon  the  proposition  that  the 
Sherman  law  has  no  application  where  the  consolida- 
tion or  acquisition  or  control,  whatever  it  may  be,  is 
brought  about  by  means  of  a  purchase.  He  stated  over 
and  over  again,  and  repeated  it  in  answer  to  questions 
by  the  Commissioners  in  his  desire  to  have  them  under- 
stand his  position,  that  that  was  his  view  and  that  by 
reason  of  that  fundamental  proposition,  as  he  put  it, 
this  i^urchase  was  legal,  although  it  did,  in  fact,  sup- 
press competition  and  although  it  might  have  been 
made  for  the  purpose  of  suppressing  competition. 

In  the  Northern  Securities  case,  in  193  U.  S.,  it  was 
argued  by  counsel  that  there  was  no  purpose  to  restrain 
competition — that  is,  that  the  purposes  of  the  incor- 
porators of  the  Northern  Securities  were  laudable,  and 
that  they  intended  to  maintain  and  to  extend  great 
oriental  commerce;  that  it  was  necessarj^  to  secure  pos- 
session of  the  Northern  Pacific  road  in  order  to  prevent 
it  from  falling  into  the  hands  of  a  line  to  the  south, 
namely,  the  Union  Pacific :  that  the  boards  of  directors 
had  been  maintained  in  their  integrity ;  that  there  had 
been  no  stifling  of  competition;  that  the  Northern 
Pacific  had  its  own  board  and  its  own  officers,  and  that 
the  Great  Northern  had  its  own  board  and  its  own 
officers. 

It  was  further  urged  there  that  only  from  3  to  4  per 
cent  of  the  traffic  of  these  two  systems  was  competitive 
traffic.  You  will  find  that  urged  in  the  brief  and  testi- 
fied to  in  the  record. 

In  spite  of  all  these  facts,  in  spite  of  these  protesta- 
tions made  by  the  gentlemen  who  incorporated  this 
company  to  the  effect  that  they  were  actuated  by  the 
highest  motives,  in  spite  of  the  fact  that  only  a  small 
percentage  of  the  traffic  was  strictly  competitive  traffic, 
the  Supreme  Court  of  the  United  States  held  that  the 
incorporation  of  the  Northern  Securities  Company  and 


133 

the  transfer  to  It  of  the  stocks  of  these  lines  which  were 
competing  lines,  although  only  for  a  short  distance 
parallel  within  the  sense  that  the  word  has  been  used 
here  by  my  friend,  was  illegal  under  the  Sherman  Act. 

But  counsel  say  that  the  Northern  Securities  Com- 
pany case  diflFers  from  this  case  by  reason  of  the  fact 
that  it  was  not  a  purchase  of  one  line  by  another  line, 
but  was  the  organization  of  a  third  corporation,  which 
took  over  the  stocks  of  the  two  companies.  Some  ex- 
pressions of  Mr.  Justice  Harlan,  in  the  majority  opin- 
ion in  that  case,  are  cited  as  holding  that  view. 

After  the  Northern  Securities  decision  was  handed 
down  the  gentlemen  in  control  of  that  company  pro- 
ceeded to  redistribute  the  stocks -they  had  acquired. 
As  you  know,  nearly  all  of  the  stock  of  the  Northern 
Pacific  and  Great  Northern  companies  had  been  ac- 
quired by  the  Northern  Securities  Company.  Under 
the  decree  entered  by  the  circuit  court  for  the  district  of 
Minnesota  in  that  case  there  was  a  prohibition  against 
the  stock  so  owned  by  the  Northern  Securities  Company 
receiving  any  dividends  or  being  voted  or  exercising 
any  control  whatever  over  the  affairs  of  either  of  the 
corporations.  Consequently  it  was  worthless  stock.  It 
was  essential  to  wind  up  the  securities  company  in  some 
way  and  distribute  the  stock  which  it  held. 

The  directors  of  that  company  decided  that  they 
would  distribute  a  certain  proportion  of  a  share  of 
Great  Northern  and  a  certain  proportion  of  a  share  of 
Northern  Pacific  stock  to  the  holder  of  each  share  of 
Northern  Securities  Company's  stock — that  is,  that 
there  should  be  a  pro  rata  distribution  to  the  holders 
of  Northern  Securities  stock,  each  one  getting  his  fair 
proportion  of  the  Great  Northern  stock  and  the  North- 
ern Pacific  stock. 

It  has  developed  in  this  record,  as  it  was  developed  in 
the  case  to  which  I  am  about  to  refer,  that  in  the  spring 
of  1901  the  Union  Pacific  interests — originally  the 
Union  Pacific,  but  afterwards  the  Oregon  Short  Line, 
which  is  a  subcompany — had  acquired  a  large  amount 
of  the  stock  of  the  Northern  Pacific  Railroad  Com- 
pany.    That  stock  stood  in  the  name  of  Mr.  Pierce  and 


134 

Mr.  Harriman,  if  I  remember  right,  but  it  was  owned 
by  the  Oregon  Short  Line. 

When  the  Northern  Securities  Company  was  organ- 
ized, a  few  million  dollars'  worth  of  that  stock  was  sold 
and  the  balance  of  it  was  exchanged  for  stock  in  the 
Northern  Securities  Company.  AVhen  this  plan  of  re- 
distributing the  stocks  of  the  Northern  Securities  Com- 
pany was  proposed,  a  suit  was  brought  by  Mr.  Pierce, 
Mr.  Harriman,  the  Oregon  Short  Line,  and  the  Equit- 
able Trust  Company,  with  which  company  this  stock 
had  been  deposited  to  secure  an  issue  of  bonds,  praying 
that  there  might  be  a  delivery  back  to  those  gentlemen 
and  to  the  Oregon  Short  Line,  not  their  proportion  of 
the  Great  Northern  and  Northern  Pacific  stock  to  which 
they  w^ould  be  entitled  under  the  plan  of  distribution 
that  had  been  adopted,  but  the  actual  Northern  Pacific 
stock  which  they  had  deposited,  or  its  equivalent.  That 
is,  the  Northern  Securities  Company  or  the  combina- 
tion of  companies  having  been  declared  illegal,  they 
asked  to  have  the  Northern  Pacific  stock  redelivered  to 
them.  In  that  case  they  urged  that  it  had  been  held 
by  the  Supreme  Court  of  the  United  States  that  the 
title  to  that  stock  had  not  passed  and  that  the  North- 
ern Securities  Company  was  a  mere  depository,  and  an 
illegal  depository,  holding  the  stock  for  the  members 
of  this  illegal  combination. 

That  .case  eventually  reached  the  Supreme  Court  of 
the  United  States,  and  the  opinion  of  the  Chief  Justice, 
speaking  for  the  unanimous  court,  defined  what  was 
held  in  the  Northern  Securities  Company  case,  and,  in 
addition  to  that,  conclusively  settled,  to  my  mind,  this 
question  as  to  whether  the  Sherman  law  can  be  vio- 
lated -by  the  ownership,  purchase,  or  acquisition  of 
stock,  in  the  same  way  that  it  can  be  violated  by  putting 
different  concerns  into  some  kind  of  a  trust,  as  was  done 
in  the  Trans-Missouri  case. 

This  case  is  reported  in  197  U.  S.  at  page  244,  entitled 
Harriman  v.  The  Northern  Securities  Company,  and  I 
beg  your  indulgence  while  I  read  a  few  comments  from 
it.  The  opinion,  as  I  stated,  was  by  the  Chief  Justice. 
Referring  to  those  expressions  in  the  opinion  of  Mr. 


135 

Justice  Harlan,  where  he  had  spoken  at  one  place  of 
the  Northern  Securities  Company  as  a  depository,  the 
court  said : 

"Counsel  argue,  however,  that  certain  expressions  in 
the  opinion  of  Mr.  Justice  Harlan  so  enlarged  the  scope 
of  the  decree  as  to  give  it  the  effect  now  attributed  to  it 
by  complainants. 

"  This  suggestion  is  inconsistent  with  the  settled  rule 
that  general  expressions  in  an  opinion,  which  are  not 
essential  to  control  a  case,  are  not  permitted  to  control 
the  judgment  in  subsequent  suits.  But  we  do  not  think 
that  the  opinion  of  Mr.  Justice  Harlan  is  open  to  the 
construction  put  upon  it.  In  speaking  of  the  situation 
as  between  the  Government  and  the  defendants,  the 
securities  company  is  sometimes  referred  to  as  the  cus- 
todian of  the  shares  and  sometitnes  as  the  absolute 
owner,  but  in  the  sense  that  in  either  view  the  combina- 
tion was  illegal.  For  the  purposes  of  that  suit  it  was 
enough  that  in  any  capacity  the  securities  company  had 
the  power  to  vote  the  railway  shares  and  to  receive  the 
dividends  thereon.  The  objection  was  that  the  exercise 
of  its  powers,  whether  those  of  owner  or  of  trustee, 
would  tend  to  prevent  competition  and  thus  to  restrain 
commerce. 

"  Some  of  our  number  thought  that  as  the  securities 
company  owned  the  stock  the  relief  sought  could  not  be 
granted,  but  the  conclusion  was  that  the  possession  of 
the  power,  which  if  exercised  would  prevent  competi- 
tion, brought  the  case  within  the  statute,  no  matter  what 
the  tenure  of  title  was." 

Therefore,  in  view  of  that  interpretation  of  the  opin- 
ion of  Mr.  Justice  Harlan  in  the  Northern  Securities 
Company  case,  this  question,  which  my  friend  has  spent 
so  much  time  in  discussing,  must  be  deemed  eliminated 
from  the  controversy. 

But  if  that  is  not  sufficient,  I  call  the  attention  of  the 
Commission  to  the  language  of  the  court,  in  this  same 
opinion,  on  page  297,  where  they  had  under  discussion 
and  consideration  this  proposition. 

The  Northern  Pacific  and  the  Great  Northern  jointly 
owned  the  Burlington,  and  it  was  claimed  by  the  North- 
ern J^ecurities  Company  in  this  litigation  that  by  rea- 
son of  its  interest  in  the  Burlington  the  Northern  Pa- 
cific was  a  competing  line  with  the  Union  Pacific,  and 


136 

that  as  the  Oregon  Short  Line  was  owned  by  the  Union 
Pacific  it  was  in  contravention  of  the  Sherman  Act  to 
turn  this  stock  back  to  the  Union  Pacific. 

The  Union  Pacific  was  the  purchaser  of  that  stock, 
to  use  the  words  so  often  employed  by  my  friends 
here — that  is,  of  the  original  stock.  It  had  bought  the 
Xorthern  Pacific  stock  in  the  market  and  it  had  turned 
that  stock  in  to  the  securities  company.  It  was  seeking 
to  get  it  back.  It  was  not  a  question  of  combination, 
like  the  Trans-Missouri  case,  but  it  was  a  question  of 
the  owner  of  that  stock,  which  had  been  turned  in  to 
the  Northern  Securities  Company,  getting  back  into  its 
own  possession,  as  owner,  as  purchaser,  the  Northern 
Pacific  stock  which  it  had  so  turned  in.  On  that  feature 
of  the  case  the  Chief  Justice  says : 

"And  it  is  clear  enough  that  the  delivery  to  com- 
plainants of  a  majority  of  the  total  Northern  Pacific 
stock  and  a  ratable  distribution  of  the  remaining  assets 
to  the  other  securities  stockholders  would  not  only  be 
in  itself  inequitable,  but  would  directly  contravene 
the  object  of  the  Sherman  law  and  the  purposes  of  the 
Government's  suit. 

"  The  Northern  Pacific  system,  taken  in  connection 
with  the  Burlington  system,  is  competitive  with  the 
Union  Pacific  system,  and  it  seems  obvious  to  us,  the 
entire  record  considered,  that  the  decree  sought  by 
complainants  would  tend  to  smother  that  competition." 

That  is  the  language  of  the  Supreme  Court  of  the 
United  States,  where  this  specific  question  was  put,  and 
it  was  specifically  held  that  the  ownership  of  the  North- 
ern Pacific  stock  by  the  Union  Pacific  would  violate  the 
Sherman  law.  In  view  of  that  decision  I  do  not  think 
it  is  necessary  to  spend  very  much  time  in  the  discus- 
sion of  this  academic  question,  which  counsel  have 
raised  here,  when  applied  to  railroad  systems,  located 
as  these  are,  if,  as  a  matter  of  fact,  they  are  competing 
systems. 

As  I  said  before,  the  matter  of  intention  cuts  no 
figure,  because  the  whole  thing  was  thrashed  out  in 
the  Northern  Securities  case,  and  it  was  held  that  the 
intention  with  which  the  stock  was  purchased  was 
immaterial. 


137 

Railroads  are  natural  monopolies.  They  are  laid 
down  along  certain  lines  and  they  carry  traffic  over 
those  lines.  If  one  line  in  competition  with  another 
is  united  with  that  other  in  any  manner  or  anywhere 
the  effect  is  to  eliminate,  to  some  extent,  competition 
and  to  restrain  trade,  under  all  of  those  decisions. 

One  other  proposition  was  urged  by  Judge  Lovett 
yesterday,  and  that  is  that  the  San  Pedro  road  is  not 
open  to  the  charge  of  being  a  combination  in  viola- 
tion of  the  Sherman  law,  for  the  reason  that  the  Union 
Pacific  built  that  line. 

Under  the  decisions  I  can  not  agree  in  that  view.  Ir- 
respective of  the  traffic  contracts  of  that  road,  which  I 
will  refer  to  later,  the  situation  as  developed  upon  in- 
quiry was  this :  Mr.  W.  A.  Clark  and  certain  associates 
organized  a  corporation  to  build  a  railroad  from  Los 
Angeles  to  Salt  Lake  City.  They  had  built  a  portion 
of  that  road  running  from  Los  Angeles  to  Riverside, 
and  they  had  acquired  by  purchase  a  terminal  line  run- 
ning from  Los  Angeles  to  San  Pedro,  giving  them  ac- 
cess to  the  Pacific  Ocean.  The  line  was  under  construc- 
tion between  Los  Angeles  and  Riverside,  and  survey- 
ing parties  were  out  through  the  Cajon  Pass  and  on 
the  desert.  Other  surveying  parties  were  starting  at 
Salt  Lake  City  and  surveying  to  the  west  and  south- 
west. 

That  was  about  1901  and  the  early  part  of  1902. 
Away  back  in  1889  the  predecessor  of  the  Oregon  Short 
Line,  long  before  the  foreclosure,  the  old  Oregon  Short 
Line  and  Utah  Northern  road,  had  constructed  some 
roads  in  southern  Utah  and  had  projected  a  line  lead- 
ing off  to  the  southwest.  It  had  done  some  grading 
through  a  mountain  canyon  known  as  the  Meadow 
Valley  Wash,  which  was  deemed  by  everybody  to  be 
practically  essential  in  building  a  line  from  Salt  Lake 
City  to  the  southwest.  This  Meadow  Valley  Wash  was 
so  narrow  and  so  crooked  that  if  two  lines  of  road  were 
put  through  it  would  be  necessary  for  them  to  cross 
each  other,  as  I  believe  the  testimony  showed,  twenty- 
six  times. 


138 

As  soon  as  the  Clark  road  was  projected  and  con- 
struction commenced  and  surveying  parties  were  out, 
and  not  until  then,  the  Oregon  Short  Line  woke  up  to 
the  fact  that  there  had  been  some  old  right  of  way- 
acquired  down  through  this  canyon  and  a  little  grading 
done  twelve  or  thirteen  years  before.  The  grading  had 
lain  there  and  gone  to  decay,  and  the  property  had  been 
sold  for  taxes.  They  thought  so  little  of  it  they  allowed 
it  to  be  sold  for  taxes.  The  Clark  people  bought  the 
tax  titles. 

As  soon  as  it  was  evident  that  the  monopoly  of  the 
traffic  from  southern  California  was  going  to  be  dis- 
turbed by  the  introduction  of  an  independent  line  the 
Oregon  Short  Line  immediately  started  up  and  said 
that  they  would  build  down  through  there.  They  com- 
menced a  series  of  lawsuits  to  enjoin  the  use  of  these 
old  abandoned  lines  by  the  Clark  people.  Counter 
laAvsuits  resulted,  and  they  all  got  tied  up.  Each  one 
of  them  had  injunctions  against  the  other,  I  believe, 
all  fighting  to  go  through  that  valley.  At  the  same 
time,  as  shown  bj'  the  testimony,  the  Oregon  Short  Line 
people  notified  the  Clark  people  that  if  the^'^  built  their 
line  through  they  would  parallel  it  into  southern 
California. 

The  witnesses,  the  counsel,  and  the  vice-president  of 
the  Salt  Lake  road,  who  testified  at  Los  Angeles,  both 
swore  they  had  projected  that  line  as  an  independent 
line.  They  expected  it  to  be  an  independent  line. 
They  expected  to  make  traffic  aiTangements  with  both 
the  L^nion  Pacific  and  the  Denver  and  Rio  Grande  at 
Salt  Lake  City  and  to  run  it  and  operate  it  as  an  inde- 
pendent line ;  but  they  were  frightened  by  these  threats 
to  parallel  their  line  and  make  it  a  financial  failure. 
They  were  discouraged  and  stopped  in  their  work  by 
this  litigation  and  with  whatever  other  pressure  may 
have  been  brought  to  bear,  which  was  not  disclosed  by 
the  record.  At  any  rate,  instead  of  carrying  out  the 
project  to  build  an  independent  line,  which  would  have 
been  competitive  in  that  region  with  the  Southern  Pa- 
cific, a  compromise  agreement  was  entered  into  which 
was  introduced  in  evidence  in  New  York,  followed  by 


139 

certain  other  agreements,  and  by  this  compromise  agree- 
ment the  $25,000,000  of  stock  of  the  Salt  Lake  road  was 
divided  into  two  parts.  Mr.  Harriman  took  one  part 
and  Mr.  Chirk  the  other — or  their  corporations,  rather — 
and  that  is  trusteed  for  a  term  of  years,  voted  by  the 
Farmers'  Loan  and  Trust  Company,  the  directorate  is 
divided,  the  executive  committee  is  divided,  as  shown 
by  the  testimony,  and  under  traffic  agreements  which  I 
will  comment  on  later  the  whole  road  and  system  is 
actually  a  part  of  the  Union  Pacific  and  Southern 
Pacific. 

Now,  under  those  conditions,  where  the  Oregon  Short 
Line  had  started  to  build  its  road,  as  they  claim,  and 
started  this  litigation,  and  had  acquired  this  interest 
for  the  purpose  of  maintaining  its  hold  in  southern 
California,  and  preventing  the  construction  and  opera- 
tion of  an  independent  line,  I  do  not  think  the  situation 
rs  presented  that  was  suggested  by  my  friend  Judge 
Lovett  yesterday,  namely,  that  we  have  something  like 
the  building  of  a  second  or  a  double  track  by  an  existing 
road. 

Now,  this  sort  of  thing  has  been  commented  on  in  the 
courts  and  in  a  case  in  Georgia,  where  it  was  proposed 
to  build  a  competing  line,  and  the  proprietors  of  an 
existing  line,  after  the  road  had  been  started,  bought  up 
the  construction  company  and  eliminated  this  competi- 
tion in  that  way,  it  was  held  to  be  a  violation  of  the 
constitution  of  Georgia  prohibiting  the  consolidation 
of  competing  linas,  just  the  same  as  though  the  line  had 
l:>een  completed  and  put  in  operation  and  was  after- 
wards bought  up.  So  I  say  I  do  not  think  we  have  ex- 
actly the  case  suggested  by  Judge  Lovett. 

Now.  there  was  another  remark  made  in  passing  by 
one  or  both  counsel.  That  is,  that  the  effect  of  this 
has  not  been  to  eliminate  all  competition;  that  there 
are  other  lines  running  to  the  coast.  As  was  said  by 
Judge  Lovett,  where  they  are  parallel  they  are  a  thou- 
sand miles  apart  with  a  competing  line  in  between,  the 
Santa  Fe.  That  is  utterly  immaterial.  It  does  not 
make  any  difference  how  many  roads  there  are  compet- 
ing if  one  of  the  competitors  is  bought  by  another ;  that 


140 

is  illegal.  In  a  case  decided  in  the  chancery  court  of 
New  Jersey — I  have  not  the  New  Jersey  citation,  but  it 
is  the  I7th  Lawyers'  Reports,  annotated,  page  97 — it 
was  held  that  where  one  coal  road  proposed  to  acquire 
another  coal  road,  where  there  were  six  competing,  it 
was  not  necessary  for  the  Government  to  stand  by  or 
the  State  to  stand  by  until  the  monopoly  was  complete, 
but  the  Attorney-General  was  entitled  to  his  injunction 
against  the  acquisition  of  the  second  road  by  the  first. 
So  I  do  not  think  that  can  be  seriously  urged.  I  think 
it  was,  perhaps,  a  remark  made  in  passing  by  Judge 
Lovett. 

So,  for  all  these  reasons  that  I  have  suggested,  it 
seems  to  me  there  can  be  very  little  doubt  that  we  have 
presented  here  a  violation  of  the  law  of  1890 — the  Sher- 
man law — if,  as  a  matter  of  fact,  the  Southern  Pacific 
line  was  a  competitive  line  with  the  Union  Pacific.  I 
think  we  are  thrown  back  to  the  question  which  Judge 
Lovett  argued  very  well  yesterday,  as  to  whether  in 
fact  they  are  competitive  lines,  because  if  they  are,  I 
think  it  must  be  conceded  that  under  the  decisions  of 
the  Supreme  Court  of  the  United  States  the  manner  in 
which  that  control  is  exercised  and  the  fact  that  it  is 
exercised  by  means  of  ownership,  by  means  of  purchase, 
is  quite  as  sufficient  as  though  it  were  done  in  some 
other  way. 

Now,  let  us  see  whether  the  evidence  here  fairly  dis- 
closes the  fact  that  these  are  lines  which  are  not  sus- 
ceptible of  being  put  together  in  the  manner  that  has 
been  employed  or  in  any  other  way. 

The  Southern  Pacific  line,  so  far  as  its  rail  lines  are 
concerned,  begins  at  New  Orleans  and  runs  through  the 
States  of  Louisiana  and  Texas  and  the  Territories  of 
New  Mexico  and  Arizona,  thence  through  California, 
up  to  Portland,  Oreg.  It  also  has  the  other  line  run- 
ning east  from  Sacramento  to  Ogden,  Utah,  with  vari- 
ous branches  and  feeders. 

The  Union  Pacific  begins  at  Omaha  on  the  Missouri 
River  and  goes  west  to  Ogden,  and  with  its  connections 
or  subcompanies,  the  Oregon  Short  Line  and  the  Ore- 


141 

gon  Railroad  and  Navigation  Company,  proceeds  also 
to  Portland,  Oreg.,  so  that  both  lines  start  at  Port- 
land, Oreg. — the  rails  of  one  end  at  the  Mississippi 
River  and  of  the  other  at  the  Missouri  River.  They 
both  have  rail  connections  into  the  Chicago  terri- 
tory, so  called.  The  Union  Pacific  has  rail  connections 
into  the  Atlantic  seaboard  territory,  and  that  territory 
is  reached  not  only  by  rail  connections,  but  by  the  boats 
of  the  Southern  Pacific  running  from  Galveston  and 
New  Orleans. 

Now,  going  back  to  the  Pacific  coast,  at  the  time  of 
the  purchase  of  this  stock  the  Southern  Pacific  was  op- 
erating its  line  from  Portland  to  San  Francisco,  and 
the  Union  Pacific  interest — that  is,  the  Oregon  Short 
Line — was  operating  in  competition  with  that  line  a 
line  of  steamers  from  Portland  to  San  Francisco.  That 
those  lines  were  competing  and  that  they  are  still  each 
seeking  for  business  is  undisputed,  although  Mr.  Jones, 
the  general  traffic  manager  of  the  Southern  Pacific,  tes- 
tified at  San  Francisco  that  as  far  as  rates  are  con- 
cerned they  go  up  and  down  automatically.  If  the 
steamship  rates  are  put  up,  the  rail  rates  go  up.  He 
said  it  was  not  even  necessary  to  refer  that  matter  to 
him,  because  the  rate  clerks  had  instructions  that  when- 
ever the  steamer  rates  went  up  they  should  put  up  the 
rail  rates. 

Mr.  LovETT.  Established  differentials? 
Mr.  Severance.  Yes;  that  is  right;  established  dif- 
ferentials. When  I  asked  him  if  he  thought  that  was 
fair,  when  the  steamship  rates  had  been  put  up  by  reason 
of  the  increased  expense  of  handling  the  business,  which 
had  been  testified  by  the  manager  of  the  steamship  com- 
pany, he  said  he  thought  it  was  quite  fair.  So  we  have  a 
rate  clerk  competition  now  between  San  Francisco  and 
Portland.  That  those  lines  were  competing  lines  for  pas- 
sengers and  for  freight  of  course  can  not  be  contro- 
verted. In  addition  to  that,  in  the  old  days  the  Oregon 
Railroad  &  Navigation  people  ran  a  line  of  boats  on 
the  Willamette  River  to  pick  up  traffic  that  was  com- 
petitive with  the  Southern  Pacific  and  take  it  into  Port- 


142 

land,  where  it  was  put  into  cars  and  shipped  to  the 
East  or  to  San  Francisco  or  wherever  it  might  go. 
They  were  run  in  connection  with  the  rail  lines. 

So  that  there  existed  those  competitive  conditions 
there.  Then  the  testimony  in  this  case  shows  that  from 
all  the  Chicago  territory  and  all  along  the  line  of  the 
Illinois  Central — the  control  of  which  has  now  been 
acquired  by  the  Union  Pacific — all  along  that  line  there 
was  active  competition  for  Pacific  coast  business.  That 
is  testified  to  by  Mr.  Markham,  formerW  assistant  traf- 
fic manager  for  the  Illinois  Central  for  a  great  many 
years. 

Mr.  LovETT.  Mr.  Severance,  you  do  not  claim  there 
is  any  evidence  that  the  control  of  the  Illinois  Central 
has  been  acquired  by  the  Union  Pacific  ? 

Mr.  Severance.  Yes;  I  claim  that  for  this  reason. 
I  claim  that  absolutely  on  the  testimony  of  Mr.  Kahn, 
given  in  New  York.  It  appears  by  the  testimony  in  the 
case  that  the  Union  Pacific  have  purchased  about  29^ 
per  cent  of  the  stock  of  the  Illinois  Central,  and  Mr. 
Kahn  testified  that  under  ordinary  conditions  that  was 
sufficient  to  dominate  and  establish  the  control.  He 
said  that  it  would  maintain  the  control  except  in  case 
extraordinary  efforts  were  made  to  organize  the  rest 
of  the  stockholders. 

Mr.  LovETT.  There  is  no  dispute  about  the  fact  that 
the  ownership  is  only  29^  per  cent  ? 

Mr.  Severance.  That  is  right. 

Mr.  LovETT.  The  rest  is  legal  conclusion  ? 

Mr.  Severance.  No;  I  do  not  agree  to  that,  Judge 
Lovett.  I  do  not  think  it  is  a  legal  conclusion  for  this 
reason.  Gentlemen  like  Mr.  Kahn  are  advised,  as  other 
witnesses  have  testified,  Mr.  Ripley  and  others  in  this 
case,  as  to  what  is  the  usual  and  ordinary  practice  of 
stockholders  in  sending  in  proxies  or  attending  meet- 
ings, so  that  it  goes  a  little  beyond  a  matter  of  a  legal 
conclusion.  The  fact  is  that  the  way  railroad  stocks 
are  scattered — this  is  in  the  record — the  way  railroad 
stocks  are  scattered  and  held  by  brokers  and  by  various 
people  here  and  there  in  small  blocks  or  in  large  blocks, 
for  that  matter,  it  is  impossible  to  get  a  full  vote  out  at 


143 

a  stockholders'  meeting.  It  further  appears  that  the 
persons  in  control  of  the  property,  having  control  of  the 
stock  books  and  the  lists,  and  getting  up  proxy  commit- 
tees, and  sending  out  the  stock  proxies,  have  a  very 
large  advantage  in  maintaining  control ;  so  that,  taking 
all  those  things  into  account — I  assume  Mr.  Kahn  took 
them  into  account  when  he  stated  that  the  29i  per  cent 
was  enough  to  make  a  substantial  control. 

Mr.  LovETT.  Will  you  allow  me  to  interrupt  you 
again  ? 

Mr.  Severance.  Certainly. 

Mr.  LovETT.  Am  I  to  understand  that  you  express  the 
legal  opinion  to  the  Commission,  as  its  counsel,  that 
29|  per  cent  of  the  stock  of  the  Illinois  Central  is  the 
control  of  that  road  ? 

Mr.  Severance.  I  say  under  ordinary  conditions  it 
is.  That  is  the  evidence  in  the  case.  In  the  absence, 
Judge  Lovett,  of  an  organized  effort. 

Mr.  Lo\-ETT.  You  recognize  that  as  a  legal  question, 
do  you  not,  as  to  whether  or  not  it  does  ? 

Mr.  Severance.  No;  I  do  not.  I  think  it  is  a  ques- 
tion of  fact,  in  view — of  course  I  am  not  so  absurd  as 
to  stand  here  and  say  that  29^  is  51.  I  do  not  say  29^ 
is  a  majority  of  the  stock,  but  I  say  under  ordinary 
conditions  surrounding  stockholders'  meetings  any  per- 
son holding  a  block  of  29^  per  cent  of  the  stock  and 
having  control  of  the  stock  books  and  the  means  of  se- 
curing proxies  would  be  very  difficult  to  dislodge.  I 
think  it  would  amount  to  substantial  control,  yes;  and 
I  am  basing  that  on  the  testimony  in  the  case.  I  am 
not  claiming,  of  course,  that  that  is  a  legal  majority — 
that  29^  is  50^. 

Mr.  MiLBURN.  You  are  not  contending  that  29  is 
more  than  71  ? 

Mr.  Severance.  I  am  not  claiming  that  at  all,  but  I 
do  claim  that  the  testimony  very  clearly  shows  that  the 
71  does  not  turn  out  at  the  stockholders'  meetings. 

Mr.  Lovett.  Do  you  claim  that  such  a  control  would 
be  a  combination  contrary  to  the  antitrust  act,  if  the 
lines  were  competing? 
3568—07  M 10 


144 

Mr.  Severance.  I  think  that  is  a  question  of  fact,  as 
I  said  before. 

Mr.  MiLBURX.  You  see,  we  are  holding  you  to  a  little 
more  rigid  rule  than  the  ordinary  counsel,  because  you 
are  the  adviser  of  the  Commission. 

Mr.  Severance.  I  am  suggesting  only  what  appears 
in  the  record  from  j^our  own  clients,  or  Mr.  Cravath's 
client,  rather,  and  from  Mr.  Ripley,  who  is  at  least  on 
fairly  cordial  terms,  I  assume,  with  the  Union  Pacific 
interests. 

Mr.  Markham  testified,  as  I  said,  that  while  he  was 
with  the  Illinois  Central  there  was  a  competition  for 
that  business.  In  discussing  this  matter  yesterday 
Judge  Lovett  said  Mr.  Neimj^er,  who  was,  before  the 
consolidation  or  before  the  acquisition  of  the  Southern 
Pacific  stock,  the  agent  only  of  the  Southern  Pacific, 
who  is  now  the  joint  agent  of  the  Southern  and  Union 
Pacific,  was  in  the  habit  of  soliciting  all  the  business  of 
the  Southern  Pacific  to  go  over  the  Ogden  route.  That 
is  not  in  accordance  with  the  statement  made  by 
Mr.  Markham,  who  was  the  gentleman  who  received  the 
solicitations,  and  Mr.  Neimyer  himself  was  not  intro- 
duced as  a  witness.  Mr.  Markham  says  that  one  Mr. 
Knight  represented  the  Union  Pacific,  and  that  he  and 
Mr.  Neimyer  were  fighting  for  that  business  along  the 
line  of  the  Illinois  Central. 

It  appears  further  that  all  the  business  east  of  a 
line  drawn  about  on  Pittsburg  and  Buffalo  takes  the 
same  rate  to  the  coast  and  is  moved  both  ways;  that  is, 
by  the  rail  lines  by  Omaha,  and  by  the  rail  lines  to 
seaboard,  and  then  by  the  boats  around  through  Gal- 
veston and  New  Orleans  and  the  Southern  Pacific  line 
to  the  coast.  All  that  traffic,  the  New  England  traffic, 
and  all  that,  is  moved  on  equal  rates,  the  Southern 
Pacific  absorbing  the  rate  from  the  point  of  origin  to 
the  seaboard,  so  that  practically  all  the  business  east  of 
the  Missouri  River  can  go  at  the  same  rate  to  the 
Pacific  coast  bj-  either  one  of  these  two  lines,  either  the 
Southern  Pacific  and  its  connections,  the  Southern 
Pacific  and  its  steamers  and  its  connections,  or  by  the 


145 

Union  Pacific  and  its  rail  connections,  the  only  differ- 
ence being  that  it  would  be  delivered  by  the  Union 
Pacific  at  Omaha  by  its  eastern  connections  and  be  de- 
livered to  the  Southern  Pacific  at  Galveston,  New 
Orleans,  or  New  York  by  some  other  rail  connection. 

Now,  again,  it  appeal's  without  controversy  that  prior 
to  the  acquisition  of  this  stock  the  Oregon  Railroad  & 
Navigation  Company,  which  is  the  Union  Pacific,  had 
for  a  number  of  years,  either  by  the  ownership  of  the 
corporation  itself  or  by  arrangement  with  some  ship- 
owners, maintained  a  line  of  steamers  from  Portland  to 
the  Orient.  The  Union  Pacific  had  also  owned  one-half 
the  stock  of  the  Occidental  and  Oriental  Steamship 
Company,  the  balance  of  that  stock  being  held  by  an- 
other corporation  called  the  Pacific  Company,  I  be- 
lieve— the  Pacific  Improvement  Company,  or  some  such 
name — and  since  1901  three- fourths  of  the  stock  of  that 
other  company  has  been  acquired  by  the  Union  Pacific, 
so  that  at  present  it  owns  seven-eighths  of  the  Occidental 
and  Oriental.  On  the  other  hand,  the  Southern  Pa- 
cific line  at  that  time  owned  a  majority  of  the  stock 
of  the  Pacific  Mail  Steamship  Company,  and  the  Pa- 
cific Mail  Company  was  also  the  agent  for  a  Japanese 
line  running  to  San  Francisco,  which  connected  with 
the  Southern  Pacific.  Consequently,  at  the  time  of  this 
amalgamation  we  had  the  Union  Pacific  with  a  half 
interest  in  the  Occidental  and  Oriental  and  having  a 
line  of  its  own  from  Portland,  and  the  Southern  Pacific 
with  the  Pacific  Mail,  or  control  of  it,  and  the  Japanese 
line  there,  which  was  operated  in  connection  with  it. 

It  is  in  evidence  that  all  of  these  lines  brought  to  the 
Pacific  coast  a  large  amount  of  traffic  from  the  Orient — 
curios,  mattings,  silks,  and  other  Japanese  goods  and 
Chinese  goods — and  that  those  were  sent  forward  to  the 
East  over  the  lines  of  the  respective  roads  with  which 
the  steamships  were  affiliated.  Consequently  at  that 
time  we  had  traffic  moving  to  the  East  over  the  Oregon 
Railroad  &  Navigation,  which  arrived  from  the  Orient 
at  Portland.     It  appears  that  the  contracts  with  the 


146 

shipowners  required  that  it  move  over  the  Oregon  Rail- 
road &  Navigation,  and  not  over  the  Southern  Pacific, 
and  the  contrary  existed  at  San  Francisco. 

Now.  at  the  present  time  all  of  these  lines  have  been 
put  under  the  common  management  of  Mr.  Schwerin, 
who  is  also  in  the  management  and  control  of  the  lines 
from  Portland  to  San  Francisco,  the  old  boat  line 
formerly  run  by  the  Oregon  Railroad  and  Navigation 
Company.  That  has  been  taken  out  of  the  Oregon 
Railroad  and  Navigation  Company  and  put  in  a  sep- 
arate company,  and  Mr.  Schwerin  manages  that.  He 
has  charge  of  all  the  steamships  on  the  Pacific  Ocean, 
no  matter  what  their  former  relations  were. 

That  was  about  the  situation  of  these  properties  at 
the  time  this  stock  was  acquired.  Since  that  time  cer- 
tain changes  have  been  made.  I  have  spoken  already 
of  the  situation  between  the  steamships  and  the  rail 
lines  between  San  Francisco  and  Portland.  Further 
than  that,  there  used  to  be  competition  into  Portland, 
both  between  the  Sunset  route,  from  the  east  on  the  one 
hand  and  the  Union  Pacific  and  its  cx)nnections  on  the 
other,  and  also  the  Southern  Pacific  by  Ogden. 

Now,  the  Sacramento  gateway,  so  called,  the  point  at 
which  the  Ogden  line  meets  the  line  from  Portland,  has 
been  closed  to  traffic  from  Portland.  We  find  at  Port- 
land at  this  time  a  general  freight  agent,  who  repre- 
sents the  Oregon  Railroad  and  Navigation  Company 
and  the  Southern  Pacific  Company  jointly.  We  find 
the  same  operating  official,  ^Ir.  O'Brien,  the  manager — 
the  car-service  agent — a  complete  amalgamation,  to  all 
intents  and  purposes,  in  all  that  region  in  northern 
California  and  Oregon:  and  the  testimony  shows  there 
was  a  large  lumber  traffic  and  wool  traffic  and  hop  traffic 
moving  to  the  east  and  to  the  mountain  States,  which 
was  competitive  between  these  lines,  and  that  competi- 
tion has  been  eliminated. 

Counsel  says  it  only  amounts  to,  I  think,  one-tenth  of 
1  per  cent  of  the  traffic  of  the  Southern  Pacific.  I  do 
not  know  what  he  includes  in  that  one-tenth  of  1  per 
cent. 


147 

Mr.  IjOvett.  I  say  of  the  two  systems — not  of  tho 
Southern  Pacific,  but  of  the  two  systems. 

Mr.  Severance.  Well,  I  do  not  know  what  traffic  is 
included,  whether  that  includes  lumber  and  wool  and 
hops,  and  all  the  other  products  that  go  there,  together 
with  merchandise,  out  or  not.  Of  course  I  do  no< 
know. 

Mr.  LovETT.  Everything. 

Mr.  Severance.  There  is  no  evidence  in  the  record — 
of  course  I  am  sure  Judge  Lovett  believes  it  shows  that 
or  he  would  not  state  it — but  there  is  no  evidence  in  the 
record  as  to  the  extent.  It  is  admitted,  however,  that 
competition  has  been  absolutely  eliminated;  and  it  has 
gone  to  this  extent :  All  the  business  of  Oregon  from 
as  far  south  as  Ashland,  on  the  Southern  Pacific — Ash- 
land is  about  400  miles,  if  I  remember,  south  of  Port- 
land— all  the  business  going  to  the  east  that  originates 
on  that  400  miles  of  the  Southern  Pacific  moves  by  way 
of  Portland  and  thence  over  the  Oregon  Railroad  and 
Navigation  and  thence  by  the  Union  Pacific. 

Mr.  Lovett.  Will  you  allow  me  to  interrupt  you? 

Mr.  Se\t:raxce.  Yes. 

Mr.  Lovett.  Of  course  you  do  not  contend  that  any 
of  the  business  as  far  south  as  Ashland  was  ever  in 
competition,  or  anything  south  of  Salem,  about  60 
miles  from  Portland?  The  Union  Pacific  never  had 
any  line  south  of  Salem. 

Mr.  Severance.  That  is  true. 

Mr.  Lovett.  It  was  solely  business,  I  said,  that  it 
might  send  any  way. 

Mr.  Severance.  That  is  true.  Oh,  it  was  above 
Salem.  The  competitive  business  was  about  90  miles, 
or 

Mr.  Lovett.  Sixty  miles. 

Mr.  Severance.  Well,  whatever  the  record  shows; 
but  I  was  calling  attention  to  the  situation  that  exists 
there.  That  traffic,  instead  of  moving  over  the  South- 
ern Pacific,  is  sent  up  to  Portland  and  sent  east  over  the 
Union  Pacific.  That  may  be  a  matter  of  no  special 
consequence  to  the  public.    It  may  be  a  matter  of  some 


148 

consequence  to  the  Southern  Pacific  stockholders,  the 
minority  stockholders — or  rather  the  majority  stock- 
holders— the  stockholders  other  than  the  Union  Pacific, 
whose  business  is  being  sent  around  that  way  instead  of 
flowing  out  to  the  south  over  the  Southern  Pacific.  I 
am  merely  stating  the  situation  that  exists.  The  com- 
petitive business,  as  stated  by  Judge  Lovett — he  is  quite 
correct — only  went  up  for  a  few  miles. 

Mr.  Loat:tt.  In  view  of  your  reference  to  the  stock- 
holding interests,  will  you  not  state  in  that  connection 
that  the  testimony  shows 

Mr.  Severance.  I  was  just  going  to  do  that. 

Mr,  LovETT.  That  the  Southern  Pacific  made  the  di- 
vision to  avoid  the  hauling  of  this  traffic  over  two  moun- 
tain ranges? 

Mr.  Severance.  I  was  going  to  state  that.  There 
was  a  new  division  made  by  Mr.  Stubbs.  acting  for  both 
roads,  in  which  he  tried  to  make  up  to  the  Southern 
Pacific  as  best  he  could  what  it  lost  by  reason  of  moving 
its  traffic  by  Portland,  T  was  just  starting  to  say  that 
when  you  interrupted.  But  that  of  course  was  Mr. 
Stubb's  best  judgment,  acting  for  both  roads. 

Now,  as  to  whether  these  lines  I  have  sketched  in  this 
way  were  competitive  lines,  not  only  the  railroads,  but 
the  steamers,  is  a  question  of  fact.  It  is  not  a  legal 
deduction,  but  it  is  a  question  of  fact,  and  upon  that 
question  of  fact  there  does  not  seem  to  be  much  diver- 
sity of  opinion  from  railroad  men  who  have  been  famil- 
iar for  many  years  with  railroad  affairs.  Mr.  Stubbs, 
who  certainly  can  not  be  accused  of  being  prejudiced 
against  these  respondents  here,  testified  in  Chicago  that 
in  the  old  days  prior  to  the  interstate-commerce  law 
there  was  competition  between  all  the  lines  to  Califor- 
nia, and  there  was  a  pool  between  the  Southern  Pacific 
and  the  Union  Pacific,  and  that  each  one  was  accorded 
its  percentage,  and  that  he  was  fighting  for  as  large  a 
percentage  as  he  could  get  for  the  Southern  Pacific  line. 
Mr.  Markham's  testimony  I  have  already  referred  to. 

Mr.  Lovett.  Mr.  Severance,  I  am  sure  you  do  not 
intend  to  misstate  Mr.  Stubbs's  testimony. 


149 

Mr.  Severance.  Of  course  I  do  not. 

Mr.  LovETT.  The  percentage  that  was  allowed  the 
Union  Pacific  and  the  Southern  Pacific,  to  which  he 
testifies  there,  was  a  division  of  the  percentage  allowed 
the  line  made  up  of  the  Union  Pacific  and  the  Central 
Pacific.     Of  course  that  was  divided  between  them. 

Mr,  Severance.  Yes ;  but  the  line 

Mr.  LovETT.  As  connecting,  not  as  competing  lines. 

Mr.  Severance.  No;  I  beg  your  pardon.  You  are 
mistaken  about  that.  I  will  read  you  the  testimony. 
You  are  wrong  about  that.  Judge  Lovett. 

Mr.  LovETT.  All  right. 

Mr.  Severance.  His  attention  was  particularly  called 
to  the  Sunset  route  and  also  to  the  other  lines.  He 
spoke  of  that  other  line.  Of  the  two  together — that  is, 
the  one  line  made  up  of  the  Southern  Pacific.  That  is, 
the  Central 

Mr.  Lo\'ETT.  Of  course  the  Sunset  route  got  a  share 
too. 

Mr.  Severance.  Certainly  it  did.  That  is  what  I 
mean. 

Mr.  Lovett.  All  the  transcontinental  lines  got  a 
share. 

Mr.  Severance.  That  is  it  exactly. 

Mr.  Tx)vett.  But  the  share  allowed  to  the  Southern 
Pacific  was  for  the  all-rail  line  that  was  divided  between 
the  Central  Pacific  and  Southern  Pacific  as  connect- 
ing lines. 

Mr.  Severance,  Very  good.  There  Avas  a  division 
of  this  through  businass — this  transcontinental  busi- 
ness— between  the  members  of  a  pool,  and  one  line 
was  made  up  of  the  Union  Pacific  and  the  Central 
Pacific  and  the  other  was  made  up  of  the  Sunset.  That 
is  correct,  is  it  not? 

Mr.  Lovett.  That  is  correct. 

Mr.  Severance.  That  is  it  exactly;  and  in  those 
meetings  each  one  was  contending  for  all  he  could 
get,  and  the  Sunset  was  contending  for  more  as  against 
the  Union  Pacific  line,  in  connection  with  the  Central 
Pacific  at  Ogden. 


150 

Now,  Mr.  Hannaford  was  examined  about  that: 

"  Q.  Mr.  Hannaford,  in  the  old  days  prior  to  the 
enactment  of  the  interstate-commerce  law,  which  was 
in  1887,  were  you  familiar  with  traffic  meetings  that 
were  held  b}^  the  transcontinental  roads?  Did  you 
attend  those  meetings  ? 

"A.  I  attended  them  all,  I  think,  except  during  the 
winter  of  1886  and  1887. 

"  Q.  You  had  been  attending  them  for  several  years, 
hadn't  you  ? 

"A.  Yes,  sir. 

"  Q.  Prior  to  that  time  did  you  often  meet  Mr.  Stubbs 
at  those  meetings  ? 

"A.  Yes,  sir. 

"  Q.  What  road  was  he  representing? 

"A.  The  Southern  Pacific. 

"  Q.  Who  represented,  if  anyone,  the  Union  Pacific 
at  those  meetings? 

"A.  Well,  various  officials  of  that  company ;  the  late 
Thomas  M.  Kimball  and,  I  think,  Mr.  Vinning  when 
we  first  met  Mr.  Clark,  the  general  manager,  and  Mr. 
Shelby,  Mr.  Munroe,  and  whoever  their  traffic  official  in 
charge  was  at  that  time. 

"  Q.  Now,  at  those  meetings  were  there  discussions 
as  to  divisions  and  pools  of  transcontinental  business? 

"A.  Prior  to  1887  there  was. 

"  Q.  Yes;  that  is  what  I  mean;  prior  to  1887. 

"A.  Yes,  sir. 

"  Q.  Did  the  Union  Pacific  and  Southern  Pacific  fig- 
ure as  indej)endent  parties  to  those  pools;  separate 
parties  ? 

"A.  Separate  roads ;  yes,  sir." 

Commissioner  Lane.  What  did  that  pool  include  ? 

Mr.  Severance.  That  included  the  Northern  Pacific, 
the  Union  Pacific,  and  the  Southern  Pacific. 

Mr.  Kellogg.  All  lines  west  of  the  Missouri  River. 

Mr.  Severance.  All  lines  west  of  the  Missouri  River. 
The  Commission  are  probably  aw^are  of  the  fact  that 
the  lines  west  of  the  Missouri  are,  in  common  railroad 
parlance,  known  as  the  "  transcontinental  lines,"  and 
that  was  the  transcontinental  pool. 

Mr.  Hannaford  further  testifies : 

"  Q.  Mr.  Stubbs  was  endeavoring  to  get  as  large  a 
percentage  of  the  business  as  he  could  for  the  Southern 
Pacific  system? 

"A.  The  indications  pointed  that  way. 


151 

"  Q.  AVhat  you  mean  by  indications  is  that  that  is 
based  on  what  Mr.  Stubbs  said,  his  arguments  in  the 
meeting? 

"A.  Yes;  certainly. 

''  Q.  And  Mr.  Munroe  or  the  other  gentlemen,  who- 
ever they  may  have  been,  who  represented  the  Union 
Pacific,  were  likewise  trying  to  get  as  large  a  percent- 
age as  they  could  for  that  line  ? 

'•A.  As  large  a  percenta^  of  earnings  or  as  small  a 
percentage  when  it  was  a  division  of  expenses." 

Then  he  was  asked  whether  prior  to  1901  he  was 
familiar  with  traflfic  conditions  so  far  as  transconti- 
nental and  overland  business  was  concerned.  He  said 
he  was.  He  was  asked  whether  there  was  active  com- 
petition prior  to  that  time  throughout  the  Atlantic 
seaboard  territory  and  the  Chicago  territory  between 
the  different  transcontinental  lines  for  the  Pacific  coast 
business.     He  answered  that  there  was. 

"  Q.  All  the  roads  were  competing  for  that  business  ? 

'•A.  Well,  all  of  the  roads  lying  west  of  a  line  drawn 
north  and  south  through  Chicago. 

''  Q.  What  Pacific  roads  were  competing  for  it  ?  The 
Southern  Pacific  was  competing  for  it,  wasn't  it  ? 

"A.  Yes  sir. 

"Q.  And  the  Santa  Fe? 

"A.  The  Southern  Pacific,  with  some  restrictions  of 
territor}-. 

"Q.  And  the  Santa  Fe? 

"A.  The  Santa  Fe. 

"  Q.  And  the  Union  Pacific? 

"A.  The  Union  Pacific. 

'"  Q.  The  Northern  Pacific? 

'•A.  The  Burlington  and  the  Denver  and  Rio  Grande 
roads.  The  Northern  Pacific  at  the  date  you  men- 
tioned; the  Great  Northern  and  the  Canadian  Pacific 
were  the  principal  lines.  Of  course  they  had  lines  that 
led  up  to  them. 

'■  Q.  Now,  has  the  Sunset  route,  the  Southern  Pa- 
cific, been  one  of  your  competitors  at  Portland  on  busi- 
ness originating  in  the  Atlantic  seaboard  States? 

''A.  Yes,  sir. 

"  Q.  How  is  that  ? 

'•A.  Yes,  sir. 

"  Q.  Has  the  route  made  up  of  the  Union  Pacific  and 
Oregon  Short  Line  and  the  Oregon  Railroad  and  Navi- 
gation Companv  likewise? 

"A.  Yes,  sir.'^ 


152 

Mr.  Hiland,  of  the  Milwaukee  and  St.  Paujj  testified, 
at  pages  153  and  154 

Commissioner  Clements.  Mr.  Severance,  we  will  sus- 
pend here  until  2  o'clock. 

The  Commission,  at  12.30  o'clock  p.  m.,  took  a  recess 
until  2  o'clock  p.  m. 

AFTER   RECESS. 

The  Commission  reassembled  at  the  expiration  of  the 
recess. 

Commissioner  Clements.  You  may  proceed,  Mr. 
Severance. 

ARGUMENT  OF  C.  A.   SEVERANCE  RESUMED. 

Mr.  Severance.  Now,  there  are  two  considerations 
that  enter  into  this  matter  of  competition  between  the 
Sunset  route  and  the  lines  made  up  of  the  combination 
between  the  Union  Pacific  and  the  Ogden  line  to  San 
Francisco.  In  the  first  place,  the  testimony  discloses, 
as  I  have  already  said,  that  commodities  can  move 
either  way  at  the  same  rates.  In  the  second  place,  there 
was  originally  a  distinct  and  active  competition  for  the 
business  conducted,  on  the  one  hand,  by  the  Southern 
Pacific,  and,  on  the  other  hand,  by  the  Union  Pacific; 
that  is,  between  the  Sunset  route  and  the  Union  Pacific. 

Then,  again,  competition  in  rates  now  is  so  largely 
eliminated  that  the  competition  of  the  future  is  compe- 
tition in  service  and  in  facilities.  With  a  thousand 
miles  of  road  running  from  the  Missouri  River  to 
Ogden,  irrespective  of  all  the  other  considerations  that 
have  been  suggested,  there  is  the  foundation  for  a  most 
active  and  energetic  competition.  Leaving  the  rates 
as  they  may  be,  leaving  them  to  be  made  up  as  they 
may  be,  giving  the  Southern  Pacific  all  the  advantage 
of  its  position  and  all  the  influence  it  can  possibl}'  have 
in  the  making  of  these  through  transcontinental  rates, 
still  it  could  have  no  control  whatever  over  the  service 
on  the  Union  Pacific,  on  the  rapidity  of  the  service 
that  way. 


153 

Then,  again,  there  is  a  very  large  traffic,  as  is  disclosed 
by  the  testimony,  into  Colorado  common  points,  coming 
from  the  seaboard,  that  moves  over  the  Union  Pacific 
from  the  Missouri  River  and  moves  around  by  the  Gulf 
ports  and  over  connections  of  the  Southern  Pacific, 
where  this  alleged  advantage  of  control  of  the  Southern 
Pacific  cuts  no  figure,  because  those  commodities  that 
move  over  the  Union  Pacific  to  Colorado  common  points 
do  not  touch  the  Southern  Pacific  at  all. 

I  will  hasten  along,  because  I  am  anxious  to  get 
through.  I  am  merely  throwing  out  these  suggestions 
to  the  Commission. 

As  to  oriental  business,  Mr.  Stubbs  testified,  at  page 
88,  that  it  was  active  competition  at  all  times.  He  says 
there  is,  even  at  the  present  time  between  the  Portland 
route  and  the  San  Francisco  route.  Mr.  Stubbs  testi- 
fied to  that,  reaffirming  what  he  said  in  his  testimony 
in  a  suit  brought  by  this  Mr.  Graham,  who  was  a  wit- 
ness and  who  is  not  considered  of  much  consequence  by 
my  friend  Judge  Lovett,  as  he  said  he  would  not  dis- 
cuss what  Graham  said. 

The  testimony  shows  that  in  the  old  days  there  was 
rate  cutting  between  the  Sunset  route  and  these  others, 
the  other  lines;  that  the  Sunset,  by  reason  of  being  a 
longer  line,  cut  rates  and  fought  for  the  business,  and  in 
passing  it  is  interesting  to  consider  Mr.  Milburn's  sug- 
gestion about  the  length  of  the  line.  He  said  it  can 
not  be  competitive  because  it  is  5,000  miles  around  by 
New  Orleans  or  Galveston  and  only  3,000  miles  across 
the  continent. 

I  could  make  a  much  more  extreme  comparison  than 
that.  It  is  veiy  much  farther  around  Cape  Horn  than 
it  is  by  the  Sunset  route,  infinitely  farther;  but  the 
strongest  competition,  the  competition  that  it  is  claimed 
should  hold  down  ratas  to  the  Pacific  coast  points  from 
the  East  is  the  competition  of  the  Cape  Horn  route  and 
of  the  Panama  route,  which  is  several  thousand  miles 
longer  than  these  others.  It  is  not  the  length  of  the 
route  that  is  important.  It  is  not  the  fact  that  to  get 
to  San  Francisco  over  the  Oregon  Railway  &  Naviga- 


154 

tion  to  Portland  and  then  down  by  boats  is  a  longer 
route  than  the  route  out  through  by  Ogden.  The  im- 
portant feature  of  the  matter  is  that  the  traffic  can  be 
moved  either  way,  and  so  far  as  these  long  lines  around 
Cape  Horn  are  concerned,  it  still  moves  in  that  way, 
by  the  Hawaiian  lines,  as  testified,  and  moves  by  Pan- 
ama and  then  up  by  the  Pacific  Mail.  So  that  the 
length  of  the  route  is  immaterial.  The  competition  is 
there.  Competition  has  always  been  there,  and  the 
competition  did  exist,  as  I  have  shown,  away  back 
prior  to  the  enactment  of  the  interstate-commerce  law, 
and  there  was  a  division  of  the  through  business. 

Just  a  few  words  about  this  Clark  road.  I  this 
morning  discussed  its  history.  It  has  also  developed 
in  connection  with  that  road — and  this  all  bears  on  the 
situation  out  there,  for  I  understand  this  investigation 
is  to  cover  the  whole  traffic  situation  there — it  developed 
in  the  course  of  the  inquiry  that  certain  traffic  con- 
tracts had  been  made,  one  with  the  Southern  Pacific, 
one  with  the  Union  Pacific  and  Oregon  Short  Line,  on 
the  one  hand,  and  the  San  Pedro  road  on  the  other; 
and  at  Los  Angeles  we  examined  very  carefully  the  wit- 
nesses, the  gentlemen  who  had  been  concerned  in  the 
making  of  these  contracts,  so  as  to  receive  any  explana- 
tion that  could  be  made  of  them.  ^ 

Now.  as  to  the  Southern  Pacific,  it  has  already  been 
referred  to.  Article  2  of  the  Southern  Pacific  agree- 
ment provides  that : 

"  In  partial  consideration  of  the  said  covenants  and 
agreements  of  the  said  Southern  Company,  contained 
in  Article  I  hereof,  said  San  Pedro  Company  hereby 
covenants  and  agrees  with  the  said  Southern  Company 
that  it  will,  ujion  the  execution  of  this  agreement, 
adopt,  print,  publish,  and  put  in  force,  at  all  points 
upon  its  leased,  owned,  or  operated  railroad,  for  the 
handling  of  local  business  thereon,  the  local  rates, 
tariffs,  classifications,  and  charges  used  by  said  South- 
ern Company  for  the  handling  of  any  local  business 
which  may  be  the  subject  of  competition  between  them." 

Amd  Article  III  provides  that  after  these  rates  are 
so  put  in  there  shall  be  no  change  for  ninety-nine 
vears  without  the  consent  of  the  two  lines. 


155 

It  was  argiied  there,  and  was  explained  by  the  officials 
of  the  San  Pedro  road,  that  that  was  intended  to  apply 
only  to  business  local  to  southern  California ;  but  there 
is  a  provision  which  was  not  satisfactorily  explained 
to  my  mind  by  the  counsel  for  the  San  Pedro  in  this 
third  paragraph,  which  is  that  these  rates  shall  be 
maintained  for  ninety-nine  years  unless  it  is  necessary 
to  change  them  by  reason  of  some  lawful  and  valid 
requirement  of  State  or  national  law,  which  would 
indicate  that  it  was  in  the  minds  of  the  parties — it 
must  have  been — that  this  would  refer  not  only  to 
local,  but  to  interstate  traffic. 

Suppose  that  in  the  future  the  San  Pedro  road,  as 
it  naturall}'  will,  builds  branch  lines  in  southern  Nevada 
and  in  eastern  California,  into  territory  where  it  will 
be  competitive  with  the  Southern  Pacific.  This  con- 
tract is  effective  as  to  that.  It  covers  all  the  roads 
that  may  be  operated  for  ninety-nine  years,  and  in 
defining  this  word  "  local "  it  is  sought  to  confine  that 
to  California,  so  as  to  take  it  out  of  the  jurisdiction 
of  this  Commission,  or  rather  out  from  under  the 
operation  of  the  Sherman  Act;  but  a  little  further  on 
in  the  hearing  at  Los  Angeles,  when  Mr.  Wells,  the 
general  manager  of  the  San  Pedro  road,  was  asked 
to  make  up  a  statement  of  the  shipments,  the  number 
of  cars  of  fruit  shipped  to  the  East  over  the  San 
Pedro  road,  he  made  up  a  statement,  and  it  was  divided 
by  himself  or  the  men  who  made  it  up — and  he  pre- 
sented it — it  was  divided  between  local  and  through, 
and  "  local "  meant  everything  west  of  the  Missouri 
River.  That  was  the  very  next  day  after  this  expla- 
nation had  been  made  that  "  local "  referred  only  to 
southern  California. 

Judge  I^)vett  practically  conceded  yesterday  that 
••  local "  in  railroad  parlance  means  local  to  the  line.  I 
can  conceive  of  traffic  local  to  the  San  Pedro  line  and 
local  to  the  Southern  Pacific  between  Ogden  and  Salt 
Lake,  as  far  as  that  is  concerned,  although  they  are  37 
miles  apart.  It  might  be  local  to  either  and  competi- 
tive. 


156 

Then,  again,  they  were  not  content  with  that  con- 
tract, but  they  made  another  traffic  contract  of  a  more 
extraordinary  character  between  the  Salt  Lake  road 
and  the  Union  Pacific  and  the  Short  Line,  its  subcom- 
pany,  they  being  of  the  one  part  and  the  San  Pedro  of 
the  other. 

It  is  provided  by  Article  II,  section  1 : 

"  Said  San  Pedro  company  hereby  covenants  and 
agrees  to  and  with  said  Short  Line  company  that  it  will 
not  hereafter,  during  the  time  of  this  agi'eement '' 

and  ninety-nine  years  was  the  term 

"  extend  its  said  main  line  of  railroad,  or  any  of  its 
branch  lines  of  railroad,  nor  construct  or  build  any 
lines  of  railroad,  or  aid  any  other  company  or  compa- 
nies in  the  construction  or  building  of  any  line  of  rail- 
road, nor  assist  or  advise  in  the  building  or  construction 
of  any  other  railroad  '' 

They  made  it  as  strong  as  they  could  possibly  make 
it,  you  see.  They  can  not  even  advise  somebody  else  to 
build  a  line  of  railroad 

"  of  any  other  railroad  than  the  said  lines  of  railroad 
described  in  Article  I  hereof,  northward  from  Salt 
Lake  City,  or  which  may  run  into  the  territory  north- 
ward of  the  parallel  of  Salt  Lake  City,  Utah.'' 

That  is,  the  San  Pedro  Railroad  for  ninety-nine 
years  can  not  build  into  the  territory  north  of  Salt 
Lake  City,  where  they  will  become  competitors  of  the 
Oregon  Short  Line  or  the  Union  Pacific  or  Southern 
Pacific  as  part  of  the  system.  For  ninety-nine  years 
they  are  prohibited  from  even  advising  anybody  to 
build  a  railroad  in  there. 

Then  the  Short  Line  Railroad  Company  turns  around 
and  covenants  and  agrees  to  and  with  the  San  Pedro 
company : 

"That  it  will  not  build  or  construct  any  railroad  or 
branch  lines  of  railroad,  or  aid  any  other  company  or 
companies  in  the  construction  of  any  railroad  which 
will  in  any  manner,  either  directly  or  indirectly,  enter 
into  the  territory  or  invade  the  territory  south  of  said 
Salt  Lake  City,  or  south  of  the  parallel  thereof,  nor  so 
as  to  in  any  manner  invade  or  encroach  upon  the  terri- 
tory of  said  San  Pedro  company  lying  south  of  Salt 
Lake  City,"  and  so  on. 


157 

''  Nor  shall  the  same  be  constructed,  built,  used,  or 
operated  for  the  purpose  or  with  the  effect  of  diverting 
the  business  naturally  tributary  to  said  San  Pedro  com- 
pany's railroad  south  of  Salt  Lake  City,  or  any  busi- 
ness originating  at  or  delivered  to  points  located  in  ter- 
ritory south  or  Salt  Lake  City  from  said  San  Pedro 
company,  or  to  said  Short  Line  company's  railroad,  or 
any  other  railroad  or  railroads." 

There  is  a  provision  by  which  a  dead  line  is  drawn  at 
Salt  Lake  City  for  ninety-nine  years,  and  these  two 
lines  of  railroad  agree  that  they  will  not  invade  each 
other's  territory  for  that  period. 

Then  again,  and  a  very  interesting  provision  in  this 
contract,  is  one  relating  to  rates  in  and  out  of  Utah 
points — interstate  rates. 

Section  6,  article  4: 

"  It  is  covenanted  and  agreed  that  said  Short  Line 
company  and  its  connections,  the  said  Union  company, 
and  each  of  them,  shall  have  the  right  to  name  and 
make  the  through  rates  between  points — that  is,  in 
both  directions — on  or  reached  by  their  respective  lines 
and  points  on  the  line  of  said  San  Pedro  company's 
road  in  Utah  for  business  which  said  Short  Line  com- 
pany or  said  Union  company  might  give  to  or  receive 
from  said  San  Pedro  company  in  competition  with 
any  and  all  other  cennections  of  said  San  Pedro  com- 
pany, provided,  however,  that  on  demand  said  Short 
Line  company  and  said  Union  company  shall  join  said 
San  Pedro  company  in  any  through  rates  necessary  to 
meet  the  rates  offered  by  any  competing  line  for  such 
business." 

Now,  until  it  is  necessary  to  meet  competition  the 
San  Pedro  absolutely  abdicates  its  power  to  make  rates 
or  to  be  consulted  in  the  making  of  rates  in  or  out  of 
Utah,  but  that  is  absolutely  turned  over  to  the  Union 
Pacific. 

It  is  hitched  onto  the  end  of  the  Union  Pacific  as 
much  as  though  it  had  been  sold  to  the  Union  Pacific, 
so  far  as  the  power  to  make  rates  is  concerned.  It  is  a 
common  thing  that  rates  are  made — I  think  it  is  quite 
usual  that  rates  are  made  by  the  originating  carrier; 
but  here  it  is  specifically  provided  that  in  both  direc- 
tions, in  and  out,  the  rate  shall  be  made  by  the  Union 
Pacific. 


158 

Then  there  is  a  very  interesting  provision  in  this  con- 
tract, which  is  to  the  effect  that  nothing  in  the  contract 
contained — I  will  not  stop  to  read  it — but  that  nothing 
in  the  contract  contained  shall  be  deemed  in  any  way  to 
interfere  with  the  business  done  by  the  Union  Pacific  in 
connection  with  the  Southern  Pacific. 

So  that  the  Clark  road,  as  a  factor,  as  a  possible  com- 
petitive factor  in  any  way,  shape,  or  manner  for  a 
period  of  ninety-nine  years,  is  absolutely  eliminated, 
and  it  is  made  part  of  the  Union  Pacific  system. 

Taking  those  things  in  connection  with  the  history  of 
the  Boad  and  the  way  it  was  created,  I  think  it  goes 
very  far  beyond  that  Judge  Lovett  yesterday  suggested, 
namely,  that  it  was  nothing  more  than  the  construction 
of  an  additional  or  double  track. 

Mr.  LovETT.  A  partnership. 

Mr.  Severance.  A  partnership ;  yes. 

Now,  with  reference  to  the  Santa  Fe,  just  a  few 
words,  because  there  was  an  inquiry  into  the  relations 
between  the  Santa  Fe  and  the  Union  Pacific  system.  It 
appeared  at  the  hearing  in  New  York  that  $10,000,000 
of  the  stock  of  the  Santa  Fe  road  had  been  purchased 
by  the  Union  Pacific.  It  appeared  by  the  testimony  of 
Mr.  Ripley  that  Mr.  Harriman  had  demanded  a  rep- 
resentation on  his  board,  that  he  found  out  that  about 
$30,000,000  of  stock  was  controlled  by  Mr.  Harriman 
and  his  associates,  and  that  under  the  cumulative  sys- 
tem of  voting  they  could  elect  two  directors.  Conse- 
quently he  told  them  that  they  might  elect  two  direct- 
ors, but  he  did  not  want  him  to  elect  any  officials  of 
.the  Union  Pacific.  He  said  he  would  not  have  officials 
of  the  Union  Pacific  on  his  board.  So  they  chose  Mr. 
Rogers  and  Mr.  Frick,  both  of  whom  were  directors  of 
the  Union  Pacific.  In  the  law  books  directors  are 
classed  as  officials,  but  they  are  not  classed  as  officials 
by  Mr.  Ripley  in  his  testimony.  But  there  is  the  rela- 
tion between  these  companies.  ^ATiether  this  $10,000,- 
000  of  stock  that  was  bought  by  the  Santa  Fe  was  pur- 
chased from  Mr.  Harriman  and  his  associates,  who  had 
the  $30,000,000,  does  not  appear  by  the  testimony.     If 


159 

it  was,  then  they  still  have  $30,000,000  of  stock  among 
them.  Otherwise  they  have  $40,000,000.  But  this  sit- 
uation does  develop,  and  it  is  important  in  considering 
the  whole  traffic  situation  in  California.  It  appears 
that  some  years  ago  the  Santa  Fe  road  had  a  line  of 
steamships  to  the  Orient  from  San  Diego.  It  was  not 
a  profitable  line,  that  is  true ;  and  the  Pacific  Mail  Com- 
pany, the  majority  of  the  stock  of  which  is  owned  by 
the  Southern  Pacific,  made  arrangements  with  the  offi- 
cials of  the  Santa  Fe  to  discontinue  that  independent 
service  and  take  their  oriental  freight  to  San  Francisco 
upon  an  understanding,  indefinite  as  to  amount,  as 
stated  by  Mr.  Schwerin,  but  an  understanding  that  they 
were  to  be  fairly  taken  care  of  in  the  matter  of  oriental 
traffic. 

It  appears  from  Mr.  Schwerin's  testimony  that  the 
steamship  company  which  maintains  a  full  organiza- 
tion in  the  Orient  and  solicits  its  traffic  has  the  disposi- 
tion of  the  freight,  so  far  as  its  forwarding  to  the  East 
is  concerned.  They  can  route  it,  and  he  says  that  about 
the  middle  of  last  summer — his  testimony  was  that  it 
was  about  six  months  ago,  and  the  testimony  was  given 
in  January — about  the  middle  of  last  summer,  Mr. 
Schwerin,  the  vice-president  of  the  Pacific  Mail,  and 
the  general  freight  agent  of  the  Santa  Fe,  and  the  gen- 
eral freight  agent  of  the  Southern  Pacific,  made  an 
agreement  that  instead  of  Mr.  Schwerin  dividing  this 
traffic  as  he  had  been  doing  in  somewhat  disproportion- 
ate percentages,  that  thereafter  until  some  new  deal  was 
made  it  should  be  divided  evenly  between  the  two 
lines.  That  deal  was  made  sometime,  of  course,  after 
the  Union  Pacific  men  went  on  the  Santa  Fe  director- 
ate. It  was  made  last  summer,  and  he  says  the  way  it 
is  done  now  is  this.  When  a  ship  comes  from  the 
Orient  loaded  with  a  cargo  which  is  to  be  carried  to 
the  East,  they  give  it  to  the  Santa  Fe.  AATien  the  next 
ship  comes  in  loaded  with  a  like  cargo,  he  delivers  it 
to  the  Southern  Pacific. 

Mr.  Lo^t:tt.  It  was  25  per  cent ;  not  evenly. 

Mr.  Severance.  No:  I  beg  your  pardon.  It  had 
3568—07  M 11 


160 

formerly  been  divided  75  and  25  per  cent,  but  he  says 
since  last  summer,  under  this  a^eement,  it  is  divided 
one  shipload  to  one  and  one  shipload  to  the  other. 

Mr.  LovETT.  My  understanding  is  that  the  testimony 
was  that  formerly  it  was  divided,  each  cargo,  certain 
proportions  of  it,  25  and  75  per  cent,  and  subsequently 
it  was  changed  so  that  distribution  was  by  ships,  that 
one  road  Avould  get  all  of  one  cargo  and  the  other  road 
all  of  another  cargo,  but  not  evenly,  still  maintaining 
the  percentage. 

Mr.  Severance.  Mr.  Lovett,  it  is  not  important  as  to 
the  percentage,  but  I  am  quite  sure  you  are  mistaken 
about  that. 

Mr.  Lovett.  All  right. 

Mr.  Severance.  You  recall  very  well  that  he  testi- 
fied that  the  steamship  companies  now  delivered  one 
cargo  to  the  Santa  Fe  and  the  next  cargo  to  the  South- 
ern Pacific,  do  you  not,  and  have  for  the  last  six 
months  ? 

Mr.  Lovett.  They  delivered  one  cargo  to  one  com- 
pany and  another  cargo  to  another,  but  not  alternating 
all  the  time. 

Mr.  Severance.  I  think  his  testimony  is  that  they  do 
alterftate,  and  have  since  last  summer.  Previous  to 
that  it  was  divided  on  a  different  basis. 

Mr.  Lovett.  It  is  not  material. 

Mr.  Severance.  It  is  not  material,  but  it  is  appor- 
tioned. If  there  is  an  arrangement  by  which  certain 
traffic  is  arbitrarily  divided  in  that  way,  it  is  a  matter 
for  the  consideration,  perhaps,  of  the  proper  officers  of 
the  Government  who  have  to  do  with  such  things. 
That  is  traffic  which  is  landed  there  and  which  is  di- 
vided in  that  way.  I  am  speaking  of  the  relations  be- 
tween these  companies. 

Again,  it  was  testified  there  by  Mr.  Bissell,-the  assist- 
ant freight  traffic  manager  of  the  Santa  Fe,  approving 
really  what  Mr.  Stubbs  himself  had  testified  in  another 
hearing,  that  there  is  no  competition  between  the  two 
lines,  the  Santa  Fe  and  the  Southern  Pacific,  for  the 
citrus-fruit  business  out  of  southern  California.     This 


161 

is  a  very  large  traffic,  and  they  say  it  was  agreed  several 
years  ago  that  there  should  be  no  competition  between 
them,  that  is,  they  would  not  seek  for  each  other's 
business ;  but,  curiously  enough,  although  the  testimony 
at  Los  Angeles  showed  that  60  per  cent  of  this  fruit 
was  tributary  to  the  Santa  Fe — that  is.  the  packing 
houses  that  shipped  60  per  cent  of  the  fruit  were  on  the 
tracks  of  the  Santa  Fe — Mr.  AVoodford,  the  manager  of 
the  Southern  California  Fruit  Exchange,  which  ships 
about  47  per  cent  of  all  the  fruit  in  southern  Califor- 
nia, I  think  about  12,000  or  14,000  carloads  a  year,  and 
who  is  kept  in  touch,  by  means  of  circulars  sent  to  him 
by  the  various  lines,  with  the  amount  of  shipments 
moving  each  way,  testified  that  last  year  almost  ex- 
actly 45  per  cent  went  by  the  Santa  Fe,  instead  of  60 
per  cent,  45  per  cent  by  the  Southern  Pacific,  and  10 
per  cent  by  the  Salt  Lake. 

So  that  in  some  way  or  other  this  result  came  about. 
It  is  admitted  by  Mr.  Bissell  and  Mr,  Stubbs  that  there 
is  no  competition ;  but  in  some  way,  which  is  not  dis- 
closed— the  result  is  disclosed — there  is  that  arrange- 
ment, or  at  least  that  result  is  reached,  by  which  45 
per  cent  went  by  the  Southern  Pacific,  45  per  cent  by 
the  Santa  Fe,  and  10  per  cent  by  the  Salt  Lake  road. 

Then,  again,  another  thing  came  out  there,  which 
shows  the  relation  between  these  various  companies. 
It  appears  that  when  the  Salt  Lake  road  was  first 
opened  it  put  on  a  fast  train  to  Chicago  with  frait — a 
six-day  train.  The  fruit  men  testified  that  it  was  a 
matter  of  several  hundred  dollars  a  car  sometimes 
to  save  a  couple  of  days  in  transit.  That  ran  a  few 
trips.  Mr.  Wells,  the  general  manager,  said  that  the 
other  lines  protested  vigorously  against  running  that 
train,  because  their  lines  took  eight  or  nine  days  to 
make  the  trip,  but  he  said  they  did  not  abandon  it 
for  that  reason.  Commissioner  Lane  asked  him  why 
it  was — if  it  simply  just  stopped — and  he  said,  "  Yes; 
it  just  stopped,"  and  it  has  never  been  resumed. 

Those  relations  exist  out  there,  and  taking  into  ac- 


162 

count  the  situation  as  between  the  Southern  Pacific  and 
the  Santa  Fe  between  the  Salt  Lake  road,  controlled, 
managed,  hand  and  foot,  as  it  is,  by  the  Union  Pacific 
system,  it  looks  to  me  as  though  there  is  not  a  very 
vigorous  competition,  to  say  the  least,  in  the  large  busi- 
ness out  of  California. 

Recently  another  thing  has  been  done  there  that 
shows  what  Mr.  Harriman  called  the — he  did  not  like 
"  community  of  interest,"  but  some  word  like  it — com- 
mon interest  of  the  companies. 

Mr.  Kellogg.  Harmony  in  management. 

Mr.  Se\t:rance.  Harmony  in  management;  yes. 
That  is,  that  in  northwestern  California  there  were  a 
number  of  lines  of  road  which  belonged  to  the  Santa  Fe 
and  a  number  belonging  to  the  Southern  Pacific.  It 
was  testified  there  by  the  officials  in  San  Francisco  that 
these  lines  of  the  Santa  Fe  were  secured  with  the  inten- 
tion of  building  up  a  connection  with  San  Francisco 
Bay.  It  was  also  testified  that  it  was  the  intention  to 
extend  the  Southern  Pacific  up  there  into  the  great 
timber  country  of  northern  California.  Instead  of 
that  they  have  organized  a  company  called  the  North- 
western Pacific,  which  has  taken  over  all  these  lines. 
Half  of  the  stock  is  owned  by  the  Southern  Pacific 
and  half  by  the  Santa  Fe.  The  connections  are  to  be 
built  by  this  new  company  and  the  control  is  to  be 
ostensibly  handed  back  and  forth  each  year  in  the  same 
way  as  in  the  Alton  contract  with  the  Rock  Island, 
which  has  been  referred  to  in  this  testimony. 

Now,  as  to  the  effect  of  the  lack  of  competition  in 
Oregon,  there  is  a  lot  of  testimony  in  the  record,  given 
by  the  most  prominent  business  men  in  the  city  of  Port- 
land, which  shows  that  for  years  they  have  been  strug- 
gling to  develop  their  State.  They  have  seen  Washing- 
ton on  the  north  growing  and  being  developed,  but 
Oregon  at  a  standstill.  With  the  Southern  Pacific  run- 
ning up  toward  the  westerly  side  of  the  State,  the 
Oregon  Railroad  &  Navigation  on  the  north,  the  Ore- 
gon Short  Line  on  the  northeast,  if  those  lines  were 
competitive  lines,  with  the  immigration  into  the  west 
that  has  taken  place  in  the  last  few  years,  it  is  incon- 


163 

ceivable  that  50,000  square  miles — for  that  is  the  amount 
testified  to — of  central  and  southern  Oregon  should  be 
left  without  railroad  facilities.  Each  line  would  have 
been  going  in  there  to  get  that  business  and  develop 
the  country  and  build  it  up,  and  great  bitterness  was 
displayed  there  by  some  of  the  witnesses,  the  business 
men  of  Portland,  because  of  the  failure  to  do  anything 
to  develop  that  country,  while  large  earnings  were 
being  taken  out  of  Oregon  by  those  lines  and  used  to 
buy  stocks,  as  they  put  it,  in  eastern  lines  in  no  way 
connected  with  that  business. 

It  appears  that  since  the  last  annual  report  the  Union 
Pacific  has  bought  stocks  in  the  New  York  Central,  in 
the  Baltimore  &  Ohio,  in  the  Chicago  &  Northwestern, 
in  the  Chicago,  Milwaukee  &  St.  Paul,  and  in  the  Illi- 
nois Central.  It  was  explained  on  the  stand  that  these 
stocks  were  bought  to  use  up  the  money  that  had  been 
made  out  of  the  Northern  Securities  deal.  The  Union 
Pacific,  claiming  the  right  to  act  as  an  investment  com- 
pany, having  that  right,  perhaps,  under  its  charter, 
raised  money,  as  was  shown  in  the  testimony, 
$100,000,000  of  convertible  bonds  being  sold  to  buy 
Southern  Pacific  and  Northern  Pacific  stock,  and  after- 
wards $45,000,000  of  bonds  of  the  Oregon  Short  Line 
for  this  same  purpose.  They  acquired  this  Northern 
Securities  stock.  Owing  to  the  fact  that  stocks  were  up, 
they  made  a  large  profit.  If  they  had  gone  down,  the 
Union  Pacific  would  have  been  very  much  embarrassed 
in  carrying  on  its  functions  as  a  railroad  enterprise, 
but  they  went  up  and  they  made  a  profit.  Then  they 
reinvested  these  funds  as  they  sold  out  the  Great  North- 
ern and  Northern  Pacific  stock  in  the  stocks  of  these 
various  lines,  except  as  to  the  Baltimore  &  Ohio,  and 
the  Baltimore  &  Ohio  they  went  in  debt  for — every 
dollar  of  it. 

Mr.  Kei>logg.  Not  every  dollar. 

Mr.  Severance.  Practically  every. dollar. 

Mr.  Kellogg.  Thirty-six  million  dollars. 

Mr.  Severance.  Yes;  pardon  me;  $76,000,000  and 
some  hundreds  of  thousands  of  dollars.  They  went  in 
debt  for  that.    Mr.  Kahn  explained  that  it  was  in  an- 


164 

ticipation  of  selling  some  more  Great  Northern  and 
Northern  Pacific  stock.  If  the  Commission  will  look 
at  the  present  quotations  of  Great  Northern  and  North- 
ern Pacific  it  will  be  seen  that  the  amount  of  stock  they 
had  on  hand  undisposed  of  falls  short,  by  a  good  many 
million  dollars,  of  being  enough  to  pay  for  this  Balti- 
more &  Ohio  stpck. 

Now,  it  is  a- matter  that  I  think  should  be  seriously 
considered  by  this  Commission,  whether  any  recom- 
mendation should  be  made  with  reference  to  future 
legislation  curtailing  the  right  of  a  railroad  corpora- 
tion engaged  in  interstate  commerce  to  engage  in  stock 
speculations,  with  all  their  attendant  dangers. 

Mr.  LovETT.  Will  you  allow  me  to  interrupt  you  a 
moment,  Mr.  Severance  ? 

Mr.  Severance.  Certainly 

Mr.  LovETT.  In  the  effort,  if  the  Commission  please, 
of  counsel  to  try  to  select  topics  for  this  discussion,  this 
was  not  mentioned  as  one  of  the  subjects  we  would  dis- 
cuss. We  would  like  to  reserve  the  right  to  reply  to  the 
argument  on  that. 

Mr.  Severance.  That  is  all  I  have  to  say.  That  is 
the  last. 

Commissioner  Clements.  Yes;  you  will  have  that 
right  and  opportunity. 

Mr.  Severance.  I  think  I  have  covered  everything 
I  care  to  say,  if  the  Commission  please.  My  colleague 
will  discuss  the  Chicago  &  Alton  matter,  and  such 
matters  as  I  have  omitted;  but  this  is  all  I  care  to 
discuss. 

OBAL  ARGUMENT  OF  F.  B.  KELLOGG,  ESQ., 
Representing  the  Commission. 

Mr.  Kellogg.  If  it  please  the  Commission,  before 
taking  up  the  Chicago  &  Alton,  I  wish  to  discuss  for  a 
few  moments  certain  considerations  advanced  by  the 
counsel  for  the  Union  Pacific  road  relative  to  the  con- 
trol by  the  Union  Pacific  of  the  Southern  Pacific  line 
and  its  effect  upon  competition. 

Mr.  Milburn  particularly  advanced  three  positions: 
First,  that  if  this  was  in  violation  of  law  the  Commis- 


165 

sion  should  not  single  out  the  Union  and  Southern 
Pacific  for  its  consideration,  but  should  embrace  in  its 
investigation  all  lines  which  control  or  seem  to  control 
or  own  any  lines  which  are  parallel,  without  respect  to 
the  time  of  their  acquisition  and  to  the  jears  of  their 
ownership  and  control ;  that  if  this  control  is  void,  this 
control  of  the  Union  Pacific  over  the  Southern  Pacific, 
then  the  Pennsylvania,  the  Lake  Shore,  and  other  rail- 
way systems  have  been  and  are  controlling  competing 
lines. 

This  argument  is  not  new.  Perhaps  it  is  good;  I 
make  no  argument  to  the  contrary.  I  simply  suggest 
that  the  dire  results  which  are  always  predicted  to  fol- 
low these  investigations,  or  the  attack  by  the  Govern- 
ment on  a  particular  combination,  do  not  seem  to  follow. 

In  the  Northern  Securities  case  it  was  said  that  if 
the  control  of  the  Northern  Pacific  and  Great  Northern 
was  stopped,  disrupted,  it  would  be  a  great  injury  to 
the  commerce  of  that  great  Pacific  country  and  to  the 
commerce  of  the  Orient — which  is  not  so  important, 
but  always  seems  to  have  fascinated  the  imaginations 
of  men.     But  that  result  did  not  follow. 

Mr.  MiLBLRN,  It  was  not  changed,  was  it,  Mr.  Kel- 
logg, in  the  slightest  degree  by  the  decision  ? 

Mr.  Kellogg.  If  the  Government  had  not  stopped 
that  control  in  its  inception,  in  my  opinion  there  would 
not  have  been  to-day  three  independent  lines  of  railroad 
in  the  United  States.  If  it  is  possible  by  purchase  of 
a  bare  majority  or  even  a  minority  of  stocks,  as  well 
as  by  organizing  holding  companies  or  financing  com- 
panies, to  control  two,  three,  four,  or  five  great  systems 
of  railways,  of  course  it  is  possible,  with  reasonable 
capitalization,  for  a  holding  company  to  control  all  the 
lines  of  transportation  in  this  country. 

I  take  it  that  it  is  the  policy  of  the  people  of  the 
United  States,  as  expressed  in  the  enactments  of  Con- 
gress and  of  the  States,  that  competition  between  lines 
of  transportation,  which  are  necessary  to  the  develop- 
ment of  commerce,  which  levy  practically  a  legitimate 
tax  upon  all  commerce  to-day,  shall  be  maintained. 

Competition  has  three  important  aspects :  First,  com- 


166 

petition  between  lines  of  railway  in  the  reduction  of 
rates;  second,  competition  in  facilities  furnished  to  the 
shippers,  good  transportation,  quick  transportation,  am- 
ple transportation ;  third,  and  not  less  important,  com- 
petition in  the  construction  of  additional  railroads  and 
branches,  in  the  investment  of  the  capital  of  railways 
and  the  use  of  their  credit  in  the  development  of  that 
great  empire  which  lies  beyond  the  Missouri  River, 
much  of  it  to-day  demanding  additional  railway  facil- 
ities. 

I  believe  that  any  purchase  or  acquisition  in  any 
form  or  control  by  one  corporation  of  the  stocks  of 
competing  lines — any  organization  which  can  reach 
out  and  control  the  great  lines  of  transportation  in 
what  is  more  than  one-third,  yes,  more  than  one-half, 
of  the  United  States  to-day — is  in  violation  of  the  spirit 
of  the  Sherman  Act  and  in  contravention  of  the  policy 
of  this  Government  and  of  the  people  as  expressed  in 
a  hundred  ways. 

Now,  what  will  the  Government  do  ?  Will  it  permit 
it  or  will  it  stop  it?  It  stopped  it  in  the  Great  North- 
ern and  Northern  Pacific  case.  It  has  stopped  it  in 
great  industrial  combinations  in  other  branches  of 
business,  the  encroachments  of  which  threatened  the 
industrial  liberty  of  the  people  of  the  country. 

Mr.  Milburn  says  that  this  is  an  important  matter. 
I  do  not  deny  it ;  it  is  of  surpassing  importance.  Until 
we  as  a  people  abandon  the  principle  of  competition 
as  applied  to  railroads  or  to  industrial  corporations, 
these  questions  must  of  necessity  be  important  when 
raised  as  to  any  considerable  industry  or  any  con- 
siderable transportation  line. 

But  is  this,  as  counsel  said,  an  insignificant  and  un- 
important offender  of  the  law  ?  Is  that  true  ?  Did  not 
Mr.  Harriman,  in  an  almost  boastful  manner,  state 
that  he  intended  to  get  the  Northern  Pacific,  if  possible ; 
that  he  would  take  the  Santa  Fe  if  the  law  would  per- 
mit; that  he  would  never  stop  as  long  as  he  lived  if 
it  was  not  for  the  law?  Is  the  Union  Pacific  an  un- 
important offender?  With  between  2,000  and  3,000 
miles  of  railroad  and  a  capitalization  exceeding  $500,- 


167 

000,000,  it  controls  the  Southern  Pacific  with  7,000 
miles  of  road  extending  from  Portland  to  New  Orleans, 
with  steamships  from  San  Francisco  to  the  Orient,  and 
from  New  Orleans  to  Habana  and  New  York.  It  con- 
trols the  Oregon  Short  Line,  the  Oregon  Railroad  & 
Navigation  Company,  and  the  San  Pedro  Company, 
thereby  controlling  all  the  Pacific  lines  except  the  Santa 
Fe.  It  has  a  large  ownership  in  the  latter  company,  in 
the  interest  of  harmony,  which  seems  to  have  quieted 
the  voice  of  competition  in  all  that  great  southwestern 
country.  The  testimony  shows  that  these  companies 
have  maintained  rates ;  have  divided  traffic  on  a  percent- 
age basis;  that  they  have  joined  in  the  ownership  of  new 
lines  of  railway  north  of  San  Francisco  which  are 
being  constructed,  vesting  the  alternate  control  one  year 
in  the  Santa  Fe  and  one  year  in  the  Southern  Pacific, 
thereby  eliminating  competition  in  this  territory;  that 
the  Union  Pacific  has  a  similar  arrangement  with  the 
Rock  Island  for  the  control  of  the  Alton,  running  from 
Chicago  to  St.  Louis  and  Kansas  City ;  that  it  has  a  large 
influence — probably  a  controlling  influence — in  the  Illi- 
nois Central ;  a  stock  ownership  in  the  Baltimore  &  Ohio, 
the  New  York  Central,  the  Milwaukee  &  St.  Paul,  and 
the  Chicago  &  Northwestern.  Does  the  gentleman  call 
this  an  inconspicuous  offender  ?  As  one  of  the  Commis- 
sioners remarked,  "Is  there  no  limit  to  this?"  Are 
the  people  prepared  to  allow  any  one  man,  or  set  of 
men,  through  the  organization  of  one  corporation,  with 
almost  unlimited  credit  and  means,  to  reach  out,  either 
by  the  acquisition  or  j^urchase  of  stocks  in  other  com- 
panies, or  through  agreements  or  joint  ownerships  and 
management  in  the  construction  and  operation  of  new 
lines,  to  tie  up  and  control  the  transportation  facil- 
ities of  a  great  empire  ? 

One  further  consideration  upon  that  point.  Mr.  Mil- 
bum  advances  the  proposition,  which  my  associate  has 
discussed,  that  that  restriction  upon  competition  which 
flows  out  of  and  follows  the  purchase  of  property  is 
not  prohibited  by  the  Sherman  Act.  I  shall  not  stop 
to  discuss  that  at  any  great  length.  I  take  it,  as  I  have 
stated,  that  the  rule  established  by   Congress  is   the 


168 

maintenance  of  competition,  and  that  any  restraint 
upon  that  competition  is  prohibited  by  the  broad  and 
general  terms  of  the  Sherman  Act.  The  means  are  not 
important ;  the  end  is  the  all-important  thing. 

I  take  it  the  manner  of  restricting  the  competition 
of  competitive  railways  is  but  the  machinery  by  which 
the  inventive  genius  of  man  has  sought  to  evade  the 
law.  It  may  be  by  organizing  a  corporation,  a  holding 
company.  That  has  been  a  favorite  way  of  doing  it. 
It  may  be  by  traffic  agreements  for  joint  control  and 
operation,  invented,  I  should  think,  by  Mr.  Harriman; 
at  least,  he  has  put  it  in  force  in  the  Alton,  in  northern 
California,  and  in  the  San  Pedro.  But  the  law  looks 
through  the  means  to  the  substance.  Is  it  possible  that 
the  Northern  Securities  Company  or  any  other  com- 
pany could  not  be  organized  to  purchase  or  acquire  or 
control  or  exchange  its  stocks  for  the  stocks  of  compet- 
ing railways  because  the  power  of  control  over  those 
competing  railways  would  tend  to  suppress  or  might 
tend  to  suppress  competition,  and  that  the  broad  gen- 
eral terms  of  the  Sherman  Act  omitted  the  inhibition 
of  the  purchase  outright  by  one  competing  line  of  the 
shares  of  the  other  competing  line?  Does  that  appeal 
to  the  judgment  of  men?  I  believe  not  as  applied  to 
railways,  which  are  natural  monopolies.  But  I  be- 
lieve, as  applied  to  industrial  corporations  and  to  other 
corporations,  that  the  means  is  not  important;  that  the 
end  is  the  important  thing,  and  that  if  any  person  or 
corporation,  by  the  purchase  and  acquisition  of  stocks 
of  other  corporations,  yea,  of  the  properties  of  corpora- 
tions, seeks  to  and  does  suppress  competition  and  mo- 
nopolize and  control  the  industries  of  the  country,  it 
comes  within  the  inhibition  of  the  Sherman  Act  and 
can  be  stopped  by  the  courts.  I  think  those  principles 
are  enunciated  by  the  Supreme  Court  of  the  United 
States.  I  know  they  are  the  declarations  of  many  of 
the  State  courts.  You  will  remember  that  in  the  Dis- 
tilling and  Cattle  Feeding  case  of  Illinois  the  exact 
condition  which  the  distinguished  counsel  named  took 
place  or  was  in  existence.  The  Distilling  and  Cattle 
Feeding  Company  had  purchased  outright  the  prop- 


169 

erties  of  these  various  separate  corporations  for  the 
purpose  of  suppressing  competition  and  monopolizing 
commerce,  and  the  supreme  court  of  Illinois  held  it  void. 
That  decision  has  been  cited  and  approved,  and  other 
decisions  which  my  associate  has  mentioned  have  been 
cited  and  approved,  by  the  Supreme  Court  of  the  United 
States. 

But  that  principle  is  not  necessary  to  this  case,  and  I 
think  much  of  this  discussion  my  distinguished  oppo- 
nent would  have  better  made  in  the  Standard  Oil  Com- 
pany case.  It  is  unnecessary  to  the  discussion  of  this 
question. 

Mr.  MiLBURN.  That  will  come  in  time. 

Mr.  Kellogg.  Quite  likely. 

Mr,  MiLBURN.  Sufficient  unto  the  day  is  the  evil 
thereof. 

Mr.  Kellogg,  I  believe,  however,  that  as  applied  to 
transportation  lines  the  principle  has  been  settled  by 
the  Supreme  Court  of  the  United  States,  and  the  ques- 
tion is.  Do  the  Union  Pacific  and  the  Southern  Pacific 
come  within  the  inhibition  ? 

Now,  one  moment  on  the  question  of  competition.  I 
have  explained  my  views  on  the  elements  of  competition 
and  the  policy  of  the  law.  Were  the  Union  Pacific  and 
the  Southern  Pacific  prior  to  the  control  by  the  Union 
Pacific  competing  lines  within  the  decision  of  the  courts 
and  within  the  facts  as  proven  ? 

Judge  Lovett  cited  an  act  of  Congress  which  he 
claimed  made  these  connecting  lines  by  force  of  law, 
and  therefore  permitted  the  purchase  of  the  Southern 
Pacific  by  the  Union  Pacific — not  only  its  shares,  but 
the  absolute  entire  corporate  property.  I  am  entirely 
familiar  with  the  Pacific  Railway  act,  and  I  presume 
your  honors  are.  The  object  of  the  act  was  to  obtain 
for  the  development  of  that  country  and  the  protection 
of  the  national  domain,  through,  connecting  lines  of 
road,  not  only  from  the  Missouri  River  to  the  Pacific 
Ocean,  but  connections  with  those  lines  which  were 
then  being  constructed  east  of  the  Missouri  River  to 
Council  Bluflfs  and  Kansas  City,  The  same  act  im- 
peratively required  the  Union  Pacific  Railroad  Com- 


170 

pany  to  connect  with  the  eastern  lines  at  Kansas  City 
and  form  through  lines  to  St.  Louis,  and  to  connect  at 
Council  Bluffs  with  all  the  lines  running  east  across 
the  State  of  Iowa  and  form  through  lines  with  the  lines 
to  the  east.  But  has  anybody  ever  claimed  that  the 
act  of  Congress — forcibly  compelling  the  Union  Pa- 
cific to  make  physical  connection  so  that  there  could 
be  through  lines  of  transportation — permitted  the  con- 
necting company  to  acquire  the  Union  Pacific  if  west 
of  there  they  were  parallel  and  competing  lines  ? 

Mr.  LovETT.  The  act  did  not  authorize  them  to  con- 
solidate with  any  lines  east  of  the  Missouri  River, 
whereas  this  act  expressly  authorized  the  consolidation 
of  the  Central  Pacific. 

Mr.  Kellogg.  I  will  come  to  that.  It  was  the  Cen- 
tral Pacific  that  Congress  was  legislating  about,  not  the 
Southern  Pacific,  which  the  Central  Pacific  afterwards 
became  a  part  of  through  the  ownership  of  its  stock  by 
the  Southern  Pacific.  Congress  at  that  time  was  not 
considering  a  great  transcontinental  line,  extending  from 
Portland  to  New  Orleans  and  New  York;  and  the 
effect  of  that  act  can  not  be  expanded  beyond  the  rail- 
road which  Congress  was  then  considering,  and  in  any 
event,  until  that  power  of  consolidation  was  exercised, 
it  v/as  subject  to  the  legislation  of  Congress  repealing 
it  and  invoking  the  Sherman  Act. 

No  one  denies  that  the  Union  Pacific  can  consolidate 
with  the  Central  Pacific  or  purchase  it,  and  I  believe 
it  would  be  a  matter  of  public  policy  for  it  to  do  so. 
It  would  carry  out  the  intention,  at  least,  that  the  Con- 
gress then  had  in  forming  a  great  line  of  transportation 
from  ocean  to  ocean.  No  one  denies  their  right  to  con- 
solidate or  acquire  stocks  in  connecting  lines,  however 
large  they  may  be.  It  is  the  policy  of  the  country  and 
of  the  States  to  encourage  connecting  lines,  and  they 
should  not  be  hampered  in  any  way  in  owning  stocks 
or  securities  or  acquiring  through  lines  of  transporta- 
tion, because  that  is  in  the  interest  of  the  shipper  as  well 
as  in  the  interest  of  the  railway  company.  But  until 
the  Congress  changes  the  rule  of  competition,  it  is  not 


171 

in  the  interest  of  the  people  and  it  is  contrary  to  law 
to  acquire  competing  lines  and  thereby  stifle  competi- 
tion in  all  its  aspects. 

But  the  Supreme  Court  of  the  United  States  decided 
in  the  Northern  Securities  case  that  the  Burlington 
was — and  Mr,  Lovett  frankly  admitted  it  was — a  com- 
peting line  with  the  Union  Pacific.  Was  it  less  compet- 
ing because  it  was  a  connection  between  Chicago  and 
Omaha;  because  under  the  act  of  Congi-ess  the  Union 
Pacific  was  required  to  connect  with  it  at  Council  Bluffs, 
and  because  under  another  act  of  Congress  the  Burling- 
ton had  the  right  to  the  use  of  the  Union  Pacific's 
terminals  and  depots  and  bridge  at  Omaha?  Not  at 
all.  The  court  said  it  was  obviously  a  competing  line. 
It  strikes  the  counsel  as  being  obviously  a  competing 
line.  And  yet  it  is  a  connection  between  Chicago  and 
the  Missouri  Eiver. 

Now  as  to  competition.  As  I  said,  in  the  present  con- 
dition of  the  ownership  and  control  of  railroads,  with 
the  possible  exception  of  the  Santa  Fe,  what  competi- 
tion is  there  west  of  the  Missouri  River  on  transcon- 
tinental business  south  of  the  Union  Pacific  road  and 
between  there  and  the  Pacific  Ocean  ?  There  is  no  com- 
petition in  rates.  Everyone  knows  that  if  the  Southern 
Pacific,  in  order  to  increase  its  business,  saw  fit  to  make 
lower  rates,  the  other  transcontinental  lines,  the  Union 
Pacific  and  the  Santa  Fe,  would  have  to  follow.  Every- 
one knows  that  if  the  Union  Pacific  sought  to  do  the 
same,  even  reducing  its  proportion  of  the  through  rate, 
the  other  transcontinental  lines  must  follow.  Commun- 
ity of  interest,  conununity  of  control  by  purchase  of 
stock,  eliminates  that ;  and  it  is  not  in  the  interest  of  the 
owners  to  reduce  rates  of  the  two  lines,  when  it  might 
be  of  the  one. 

Mr.  LovETT.  Mr.  Kellogg,  do  I  understand  you  to  say 
that  if  the  Union  Pacific  had  desired  to  reduce  trans- 
continental rates  by  reducing  its  proportion  it  could 
have  accomplished  that? 

Mr.  Kellogg.  Undoubtedly  it  could  have  accom- 
plished it,  unless  the  Southern  Pacific  should  put  up 
the  rate. 


172 

Mr.  LovETT.  Suppose  the  Southern  Pacific  should 
take  out  its  joint  rate  with  it  ? 

Mr.  Kellogg.  I  do  not  think,  under  the  law,  it  can 
do  it.     It  can  not  to-day. 

Mr.  LovETT.  I  am  not  speaking  about  the  law  to-day. 
I  am  speaking  about  it  at  the  time  this  transaction 
occurred. 

Mr.  Kellogg.  I  do  not  know  about  it  then. 

Mr.  LovETT.  Whatever  it  is  you  must  judge  it  by  the 
law  as  it  existed  at  that  time. 

Mr.  Kellogg.  It  could  not  prevent  freight  going  by 
the  Southern  Pacific  line  onto  the  Union  Pacific  line, 
and  if  the  Southern  Pacific  did  not  see  fit  to  reduce  its 
rate  the  Union  Pacific  could  reduce  its  rate.  The  effect 
of  competition  in  rates  is  done  away  with ;  the  effect  of 
competition  in  facilities,  in  construction  of  lines  and 
the  development  of  new  country  is  done  away  with. 

I  go  further  than  that.  If  it  is  possible  that  there 
is  no  such  thing  as  a  competing  line  in  the  larger, 
broader  sense  of  these  great  transcontinental  sj'stems 
except  those  that  are  parallel  and  those  that  are  com- 
plete from  one  terminus  to  the  other — and  both  must 
have  the  same  terminus — then  there  are  few  competing 
lines  in  this  country;  and  two  systems  at  least,  if  not 
one,  could  control  all  of  the  transcontinental  business 
in  America  by  one  of  them  owning  a  link  in  the  other. 
And  I  take  it  the  business  is  competitive  Avhen  from  a 
large  territory  there  is  a  considerable  business  which 
may  go  over  either  line  at  substantially  the  same  rates, 
or  the  same  rates,  to  and  from  any  considerable  coun- 
try; and  it  is  competitive  in  that  larger  and  greater 
sense  when  from  all  the  Atlantic  seaboard  it  is  admitted 
commerce  may  go  by  the  Southern  Pacific  to  Pacific 
coast  terminal  points  or  maj^  go  via  rail  lines  and  the 
Union  Pacific,  a  link  in  a  great  transcontinental  system. 

Mr.  LovETT.  Mr.  Kellogg,  if  you  do  not  object  to  my 
interrupting  you 

Mr.  Kellogg.  Certainly.    Not  at  all,  Mr.  Lovett. 

Mr.  I^vETT.  Don't  you  know  that  it  is  generally  and 
universally  recognized  as  a  fact  that  the  Southern  Pa- 


173 

cific  and  the  Atchison,  between  them,  have  always  con- 
trolled the  transcontinental  traffic  to  and  from  Califor- 
nia, in  spite  of  all  that  intermediate  lines  could  do? 

Mr.  Kellogg.  That  is  not  mj-  knowledge  nor  my 
experience — my  limited  experience — in  traffic  matters 
in  that  country.  In  fact,  I  am  quite  sure  that  during 
the  days  of  the  old  pool  prior  to  1887  the  Union  Pacific 
was  the  big  end  of  the  transcontinental  business  and 
had  32  per  cent  of  the  transcontinental  business  as 
against  23  by  the  Sunset  route,  and  that  the  Union 
Pacific  has  been  one  of  the  most  important  factors  in 
transcontinental  business.  It  is  not  my  understanding 
that  the  Santa  Fe  and  the  Southern  Pacific  have  con- 
trolled the  situation.  But  if  they  had  controlled  the 
situation  it  is  not  necessary  to  wait  until  all  competi- 
tion is  eliminated  before  the  Government  stops  it. 
Otherwise  a  large  part  of  the  country  might  be  de- 
prived of  the  effect  of  competition  in  its  business,  while 
certain  parts  of  it  would  continue  to  have  it.  It  is  not 
necessary  to  wait  till  they  have  controlled  the  Santa  Fe 
and  entirely  eliminated  that  line  from  the  situation, 
and  it  makes  no  difference  in  that  commerce — trans- 
continental business,  as  commonly  known  by  freight 
men — that  between  the  Southern  Pacific  and  the  Union 
Pacific  there  is  another  transcontinental  line.  It  is  one 
less  line  for  them  to  eliminate  by  the  methods  of  owner- 
ship, control,  community  of  interest,  or  harmony  of 
management — call  it  what  you  will. 

These  seem  to  me  to  be  self-evident  facts.  From  all 
along  the  Atlantic  seaboard  the  rates  are  the  same  and 
always  have  been,  and  it  is  not  denied  that  a  Very  large 
commerce  may  go  to  and  from  the  Pacific  Ocean  over 
either  the  Southern  Pacific,  the  Sunset  route,  or  the 
Union  Pacific,  partly  by  its  own  line  to  Portland  and 
partly  by  the  Southern  Pacific  as  a  connection.  And 
certainly  you  eliminate  an  important  link  with  the 
power  of  the  Union  Pacific,  with  its  mileage  and  its 
business — you  eliminate  that  link  from  the  transconti- 
nental business,  and  you  have  suppressed  competition 
to  that  extent. 


174 

Commissioner  Lane.  That  argument  goes  to  the  ex- 
tent of  holding  that  the  Lake  Shore,  as  a  part  of  the 
transcontinental  route,  could  not  own  the  Southern 
Pacific  from  New  Orleans  to  San  Francisco  ? 

Mr.  Kellogg.  Not  necessarily. 

Mr.  LovETT.  Or  the  New  York  Central? 

Mr.  Kellogg.  Not  necessarily  at  all.  But  I  am  will- 
ing to  go  that  far  if  it  is  found  that  there  is  a  substan- 
tial traffic  which  the  New  York  Central  and  Lake  Shore 
lines  are  engaged  in  as  a  link  in  the  transportation 
across  the  continent,  which  the  Southern  Pacific  and  its 
connections  by  steamship  are  also  engaged  in.  Because 
if  you  once  permit  an  important  link  of  1,000  or  2,000 
miles  to  be  owned  by  a  competing  line,  another  link 
by  another  competing  line,  as  I  have  said  before  and  as 
you  illustrated  by  your  question  yesterday,  you  can 
with  two  corporations  eliminate  all  the  others  in  the 
United  States  and  control  the  transcontinental  business. 

Mr.  LovETT.  The  same  people  could  not  own  the 
Lake  Shore  &  Michigan  Southern  and  the  Louisiana 
Western  Railroad.     Is  that  the  contention  ? 

Mr.  Kellogg.  I  do  not  know  that  I  knoAv  where  the 
Louisiana  Western  Railroad  is. 

Mr.  LovETT.  It  is  a  part  of  the  main  line  between 
New  Orleans  and  San  Francisco,  a  Louisiana  corpora- 
tion. 

Mr.  Kellogg.  I  do  not  say  that  the  link  may  not  be 
so  inconspicuous  and  so  connected  with  other  lines  of 
road  that  it  could  be  owned ;  but  I  do  say  that  you  can 
not  take  out  of  the  transcontinental  line  a  thousand 
miles  of  one  of  the  principal  railroad  systems  of  the 
United  States  which  connects  with  another  and  tie  it 
up  to  a  thousand  miles  south  of  it  engaged  in  the  same 
general  business. 

Now,  is  there  a  large  business?  Why,  it  was  ad- 
mitted that  from  all  the  territory  west  of  Pittsburg  to 
the  Missouri  River — all  of  that  business,  practically  all 
of  it — could  go  via  the  Southern  Pacific  and  its  rail  con- 
nections or  via  the  Union  Pacific  and  its  rail  connec- 
tions, and  a  certain  amount  of  it  to  Colorado,  which  is 


175 

not  an  inconsiderable  business,  would  not  have  to  go 
over  the  Southern  Pacific  rails  at  all. 

It  seems  to  me  that  it  is  worthy  of  very  careful  con- 
sideration, for  if  it  is  possible  that  the  Union  Pacific 
road  may  take  5,000  or  6,000  miles,  nearly  3,000  of 
which  being  a  direct  transcontinental  line,  and  control 
it,  it  may  also  control  the  Burlington,  because  it  has  a 
few  hundred  miles .  of  connections  to  the  East.  The 
Burlington  might  control  the  Union  Pacific  because  it 
is  a  connection,  and  wherever  the  lines  lap  they  can  be 
controlled  by  a  competing  line.  In  other  words,  be- 
cause the  Southern  Pacific  extends  farther  east  than 
the  Union  Pacific,  it  could  go  around  the  parallelogram 
and  back  half  way  to  to  the  Pacific  coast  and  control 
that  part  of  the  through  line  simply  because  they  do 
not  run  in  territory  where  as  to  local  business  they  are 
competitive.  The  counsel  narrows  competition  not  to 
include  the  great  transcontinental  business,  which  is 
the  principal  business  of  these  systems  of  railroad  ex- 
tending from  the  Missouri  River  to  California. 

I  think  I  have  made  all  the  suggestions  that  I  de- 
sire to  as  to  that  question. 

I  desire  to  invite  the  attention  of  the  Commission  to 
a  question  to  which  the  counsel  have  devoted  a  good 
deal  of  time,  and  that  is  the  Chicago  &  Alton  Railroad. 

Mr.  MiLBURN.  I  think  I  have  heard  of  it. 

Mr.  Kellogg.  I  think  you  have  heard  of  it  before. 

Mr.  Severance.  Mr.  Milburn  did  not  speak  of  it. 

Mr.  Kellogg.  Now,  I  shall  not  attempt  to  follow  the 
counsel  in  all  of  their  analyses  of  the  earnings^  and  the 
effect  of  the  Chicago  &  Alton  capitalization  when  made 
up  on  the  theories  of  their  various  accountants  on  the 
basis  of  the  dividends  paid  before  and  the  basis 
of  the  dividends  paid  since.  A  railway  account- 
ant, or  an  expert  accountant,  however  estimable  and 
however  much  he  may  know  about  accounts,  can  take 
the  books  of  any  railway  company  and  get  a  theory 
that  sounds  quite  well.  I  shall  content  myself  with 
narrating  to  this  Commission,  as  nearly  as  I  can,  the 
cold  undisputed  facts  which  these  gentlemen  themselves 
3568—07  M 12 


176 

placed  upon  their  own  records,  and  which  appear  here 
undisputed.  It  is  not  that  the  Commission  attacks  se- 
curities that  have  been  issued  and  are  in  the  hands  of 
innocent  purchasers,  or  anything  of  that  kind  I  shall 
not  devote  any  attention  whatever  to  the  question  of 
whether,  under  the  laws  of  Illinois,  these  securities 
now  issued  are  or  are  not  valid. 

Now  it  appears  that  for  many  years  before  the  road 
was  acquired  by  this  syndicate  in  1899,  Mr.  Blackstone 
had  managed  the  Chicago  &  Alton  Railroad;  that  it 
had  been  exceedingly  prosperous;  that  it  had  paid  ex- 
ceeding 8  per  cent  dividends  to  its  stockholders ;  that  it 
had  a  low  capitalization;  that  it  was  a  model  railroad, 
as  we  all  understood  it  in  the  West,  in  capitalization  and 
in  management.  To  be  accurate,  the  book  cost  of  the 
road,  as  it  appeared  by  the  books  of  the  Alton  Company, 
was  $34,153,927.  It  had  other  assets  of  a  little  over 
$5,000,000.  Its  total  capitalization,  including  stock, 
funded  debt,  and  other  liabilities,  was  $33,951,407.  It 
owned  over  843  miles  of  railroad,  6,377  cars,  232  loco- 
motives, and  148  passenger  cars  In  less  than  seven 
years  these  gentlemen  had  expanded  that  indebtedness, 
according  to  the  last  report  of  the  Alton,  to  about  $122,- 
000,000 ;  but  as  it  is  claimed  there  are  some  duplications, 
I  will  take  the  lowest  figures  shown  by  these  reports. 
They  had  expanded  it  to  $113,894,356,  an  increase  of 
about  $80,000,000.  And  out  of  this  increase  they  had 
spent  upon  the  property  but  $18,000,000,  of  which 
$3,000,000  was  for  a  railroad  that  the  men  who  re- 
organized it  sold  to  the  Alton  Company.  In  other 
words,  they  increased  its  liabilities  about  $62,000,000  or 
$65,433  a  mile  on  946.66  miles  of  road  owned  by  the 
company,  for  which  they  did  not  give  the  company  one 
dollar — not  one  dollar — of  property  or  money  expended. 

Now.  in  all  this  time  it  had  only  increased  its  mileage 
103  miles,  and  58  of  that  was  the  $3,000,000  road  bought 
of  Harriman  and  his  associates;  only  increased  its 
locomotives  18,  its  passenger  cars  69;  and  its  freight 
cars  3,730.  I  have  no  doubt  it  improved  the  quality 
of  this  equipment;  but  to  say  that  it  was  necessary 
to  expand   the   liabilities  of  this   company   any  such 


177 

sum  as  that  for  the  purpose  of  adding  $18,000,000  to 
a  road  which  had  a  credit  so  good  that  its  bonds  then 
were  selling  on  a  basis  of  a  little  over  3^  per  cent,  is  to 
my  mind  incredible.  I  do  not  believe  it.  Why,  the 
amount  of  money  that  these  gentlemen  added  to  this 
capitalization  without  giving  it  a  dollar  of  assets  is 
more  than  the  capitalization  per  mile  of  the  majority  of 
the  great  western  lines  of  road — the  Milwaukee,  with 
$32,000  and  a  little  over  per  mile;  the  Northwestern, 
with  $32,000  per  mile;  the  Burlington,  about  the  same 
or  a  little  more;  the  Rock  Island,  $45,000;  the  Great 
Northern,  $38,000.  Of  course  there  are  other  roads  in 
the  United  States  that  far  exceeded  that. 

It  is  said  they  spent  $^2,000,000.  They  did  not  spend 
$22,000,000  out  of  this  expanded  capitalization.  Mr. 
Harriman  said  they  had  spent  $22,000,000.  On  cross- 
examination  he  admitted  his  figures  were  given  him 
by  Mr.  P'elton  and  that  he  did  not  personally  know 
anything  about  it,  except  in  a  general  way.  When  Mr. 
Felton  went  on  the  stand  he  said  that  from  the  day 
these  gentlemen  took  hold  of  the  road  down  to  the 
present  time,  this  winter,  the  company  had  (including 
the  58  miles  of  road  they  bought)  expended  $22,327,- 
219.04,  but  that  $2,708,000  was  equipment  trust  notes 
not  included  in  this  capitalization  made  since  July  1 
last,  and  $1,000,000  was  taken  out  of  earnings  and  not 
included  in  this  capitalization.  So  that,  according  to 
his  figures,  it  would  be  $18,547,219.  I  said  about 
$18,000,000,  for  the  reason  that  Mr.  Mahl,  the  comp- 
troller of  the  Union  Pacific  road,  added  this  clause  to 
Mr.  Hillard's  statement,  Mr.  Hillard  now  being  the 
comptroller  of  the  Alton  road,  and  that  statement  was 
that  they  added  but  about  $18,000,000,  and  he  was  about 
right. 

Now,  I  am  not  saying  that  other  roads  have  not 
expanded  their  capital.  I  am  saying  that  this 'one  has. 
I  am  simply  saying  that  this  is  an  example  which  the 
Commission  should  consider  when  it  considers  the 
question  of  what  recommendations  it  shall  make  to  Con- 
gress to  prevent  the  recurrence  of  such  finance.  That 
is  all. 


178 

Commissioner  Clements.  To  what  extent  can  you 
locate  the  proceeds  of  this  capitalization  beyond  what 
you  say  was  applied  to  the  railway  ? 

Mr.  Kellogg.  It  is  all  perfectly  located  by  these 
statements,  which  are  in  evidence,  and  I  think  I  can 
tell  the  Commission  substantially. 

What  is  this  capitalization  and  for  what  was  it  spent  ? 
It  is  admitted  that  at  the  time  this  road  was  recapital- 
ized or  reorganized  it  had  a  bonded  indebtedness  of 
about  eight  and  a  half  million  dollars.  The  report  of 
the  Alton — the  last  one  made  by  Mr.  Blackstone,  I  be- 
lieve in  1898 — showed  that  these  bonds  were  short-time, 
high  interest-bearing  bonds.  They  were  bonds  which 
matured  a  few  months  less  than  three  years  thereafter, 
some  of  which  were  selling  in  the  market  at  a  rate  to 
yield  3|  per  cent,  substantially  all  of  which  might  have 
been  retired  within  the  next  three  years,  and  a  number 
of  them  within  a  few  months.  With  the  credit  of  that 
line  of  railroad  it  stands  undisputed  that  it  might  have 
sold  its  4  per  cent  bonds  at  par,  and  instead  of  increas- 
ing its  fixed  charges  from  $1,000,000  to  over  $2,600,000 
per  annum,  could  have  made  all  of  these  improvements 
by  increasing  its  interest  account  $720,000  or  $750,000. 

From  this  report  for  1898  it  will  be  seen  that 
$1,785,000  of  the  Louisiana  &  Missouri  River  Rail- 
road first-mortgage  sevens  matured  August  1,  1900, 
within  a  year  after  they  sold  these  $40,000,000  or 
$32,000,000  of  bonds  they  put  upon  the  road ;  of  Louisi- 
ana &  Missouri  River  Railroad  second  sevens,  $300,000 
on  November  1,  1900;  $1,695,000  of  the  Chicago  & 
Alton  sinking  fund  sixes,  May  1,  1903,  and  $4,379,850 
of  Chicago  &  Alton  sixes,  July  1,  1903. 

These  included  all  of  the  bonds  except  $491,000,  mak- 
ing a  total  of  $8,159,850  in  bonds. 

Now,  what  did  they  do?  Mr.  Harriman,  Mr.  Schiff, 
Mr.  Gould,  and  Mr.  Stillman  bought  the  control  of 
this  stock.  But,  says  Mr.  Lovett,  Mr.  Harriman  should 
not  be  blamed  for  all  of  this.  I  am  not  blaming  Mr. 
Harriman  any  more  than  the  rest.  He  has  assumed  the 
responsibility  for  it;  I  will  say  he  has  not  shirked  it, 
and  he  said  there  were  othei*s  interested.     The  records 


179 

show  that  the  four  men  bought  all  of  the  stock  except 
73  shares  of  the  preferred  stock  and  4,287  shares  of  the 
common  stock.  When  Mr.  Harriman  was  asked  who 
the  syndicate  was  and  who  the  syndicate  managers 
were,  he  did  not  know.  He  could  not  tell  any  of  them. 
If  he  wanted  to  show  the  list,  why  didn't  he  do  it? 
But  it  does  not  make  any  difference  whether  he  repre- 
sented himself  alone  or  the  other  gentlemen  with  him, 
or  whether,  after  they  had  formed  this  syndicate,  they 
sold  certificates  to  100  or  200  men.  It  does  not  appear 
that  these  men  were  interested  in  the  ,  purchase  or 
whether  they  became  interested  in  the  syndicate  certifi- 
cates. I  do  not  think  it  is  material  as  to  the  facts  one 
way  or  the  other.  We  are  looking  into  the  capitaliza- 
tion, and  I  do  not  care  who  the  individuals  were.  Mr. 
Harriman  is  an  incident  simply  of  a  transaction  which 
you  gentlemen  are  looking  into  among  other  transac- 
tions in  railroad  finance. 

What  became  of  this  $40,000,000  of  bonds?  Imme- 
diately after  they  acquired  this  stock  they  placed  a 
$40,000,000  3  per  cent  fifty-year  mortgage  upon  the 
property.  It  does  appear,  and  could  not  appear  in  any 
other  way,  that  if  the  Chicago  &  Alton  Railroad  stock 
was  worth  $39,000,000,  its  3  per  cent  bonds  were  worth 
more  than  65.  They  certainly  sold  for  about  two  years 
at  90  or  above,  or  substantially  that,  and  they  certainly 
could  have  borrowed  all  the  money  the  Chicago  & 
Alton  wanted  at  4  per  cent.  To  take  up  the  eight  mil- 
lion six  hundred  and  some  thousand  dollars  of  prior 
mortgage  bonds  and  the  interest  and  for  other  corpo- 
rate i^urposes,  this  mortgage  was  placed  upon  the  prop- 
erty. They  sold  through  Kuhn,  Loeb  &  Co.  to  Gold- 
man, Sachs  &  Co.,  who  sold  then  to  the  New  York  Life 
$10,000,000  of  these  bonds  at  96  cents  on  the  dollar. 

It  appears  by  the  testimony  of  Mr.  Harriman  and  the 
exhibits  that  $10,000,000  of  these  bonds  were  sold,  all 
of  them,  in  October,  November,  and  December,  1899. 
The  first  $4,000,000  were  sold  on  the  17th  of  October. 
They  provided  for  the  issuance  of  these  bonds  on  the 
30th  of  June.  The  stockholders — these  four  men  who 
owned  substantially  all  the  stock — agreed  to  take  them 


180 

at  65  per  cent  on  the  7th  of  September.  They  got  the 
first  $10,000,000  authorized  on  the  10th  of  October, 
and  on  the  17th  they  sold  to  the  New  York  Life  Com- 
pany at  96.  Now,  Mr.  Harriman  said  there  was  a  gi-eat 
change  in  the  market  between  June  and  October,  but 
when  he  came  to  be  examined  and  confronted  with  the 
Financial  Chronicle,  showing  the  sale  of  bonds,  the 
change  was  the  other  way.  The  bonds  were  selling 
lower  in  October  than  they  were  in  the  previous  June 
and  May.     That  appeai-s  undisputed. 

AYliat  was  the  average  price  of  these  bonds?  I  do 
not  know  what  they  got  for  them  other  than  what  here 
appears.  They  know,  and  it  seems  to  me  if  they 
wanted  to  show  it  they  could  have  done  so.  But  I  am 
simply  taking  the  record,  their  own  figures  and  the 
figures  showing  the  price  received  for  these  bonds  in 
the  market  for  the  next  two  or  three  years.  It  does  ap- 
pear that  the  $10,000,000  not  only  sold  for  96,  but  that 
Kuhn,  Loeb  &  Co:  sold  $1,000,000  to  the  Equitable  Life 
Insurance  Company  in  1901  at  92  and  $550,000  in  1902 
at  88,  so  that  for  nearly  three  years — over  two  years — 
these  bonds  sold  between  88  and  96.  As  a  matter  of 
fact,  during  the  months  of  October,  November,  and 
December  of  1899,  all  of  1900,  and  January,  February, 
and  March  of  1901,  these  bonds  never  went  below  92^. 

Now,  those  men.  according  to  these  market  prices, 
could  have  sold  those  bonds  at  90.  ^Yh^\  the  Alton 
bonds  were  then  selling  in  the  market  on  a  3^  per  cent 
basis,  according  to  the  Financial  Chronicle,  which  is 
in  evidence;  and  L^nion  Pacific  fours,  the  Northern 
Pacific  foul's,  and  other  high-class  i*ailroad  fii'st  mort- 
gage 4  per  cent  bonds,  with  no  better  credit  than  the 
Chicago  &  Alton,  wei*e  selling  in  this  country  above 
par.  We  do  not  deny  that  at  times  railroads  can  not 
do  that,  and  they  can  not  do  it  now;  but  the}'  could 
have  done  it  then,  and  the  Alton  had  exceptionally  fine 
credit.     It  was,  in  fact,  a  shining  mark. 

Even  had  these  3  per  cent  bonds  been  placed  on  a  4 
per  cent  basis  they  would  have  sold  at  78.45 — that  is, 
placed  on  a  basis  that  they  would  produce  during  the 
fifty  years  4  per  cent.     But  they  were  sold  to  these 


181 

gentlemen  at  65,  No  amount  of  explanation  will  show 
that  to  be  good  conservative  railroad  financing,  and  it 
is  no  answer  to  say  that  it  was  done  in  other  railroads. 
It  was  certainly  done  in  this. 

But  what  became  of  the  proceeds?  Before  I  go  on 
I  might  mention,  to  show  that  these  bonds  have  always 
sold  above  Co,  that  Kuhn,  Loeb  &  Co.,  on  March  31, 
1905,  sold  $2,000,000  of  them  for  83^,  and  $3,000,000 
on  July  31,  1905.  for  83^;  so  that  there  never  was  a 
.  time  when  these  bonds  did  not  sell  in  the  market  above 
what  these  gentlemen  took  them  at. 

That  is  not  all.  I  think  I  have  a  right  to  bring  to 
the  attention  of  the  Commission  two  circumstances, 
which  do  not  commend  themselves  to  conservative  man- 
agement. One  is  that  shortly  after  the  purchase  of 
this  stock  these  gentlemen  paid  to  themselves  a  dividend 
of  30  per  cent  out  of  the  proceeds  of  this  mortgage. 
They  owned  all  the  stock  except  73  shares  of  preferred 
and  4,287  shares  of  common.  They  controlled  the  com- 
pany. If  you  deduct  this  dividend  which  they  took 
out  of  the  mortgage,  they  really  paid  about  48  or  49 
cents  on  the  dollar  for  the  bonds. 

The  fallacy,  it  seems  to  me,  of  Judge  Lovett's  argu- 
ment that  a  road  should  be  judged  by  what  it  has  paid 
out  in  dividends  and  interest  is  this :  He  said,  "  We 
haven't  paid  out  in  dividends  and  interest  much  more 
since  the  reorganization  than  was  paid  out  before." 
But  remember  that  Mr.  Blackstone  was  paying  his 
stockholders  8  per  cent  dividends,  while  the  reorganized 
Alton  was  only  paying  4  per  cent  on  its  preferred  stock 
and  nothing  on  its  common. 

Furthermore,  the  time  may  come  when  the  Commis- 
sion would  say  that  8  per  cent  dividends  was  rather 
large,  if  dividends  are  to  be  taken  as  the  basis  for  rate 
making.  I  do  not  say  whether  it  is  or  not.  A  railroad 
should  have  good  earnings.  Dividends  should  not  be 
small.  It  is  not  in  the  interest  of  the  country  to  make 
rates  so  low  that  railroad  securities,  which  form  a  large 
part  of  the  wealth  of  the  people,  should  not  receive  a 
reasonable  income,  and  should  be  depressed. 

If  the  Commission  and  the  country  have  no  interest 


182 

at  all  in  investigating  the  question  of  overcapitaliza- 
tion, if  they  have  no  interest  in  the  stability  of  securi- 
ties placed  on  the  market  in  which  people  invest  their 
savings  and  which  they  buy  on  the  faith  of  the  security, 
then  perhaps  Judge  Lovett's  theory  is  correct,  that  the 
amount  of  the  securities  issued  is  entirely  immaterial. 
I  prefer  to  adopt  Mr.  Cravath's  suggestion  that  the 
people  have  an  interest  in  this,  and  that  there  should  at 
this  day  be  reasonable  regulations  which  will  insure  the 
stability  and  the  safety  of  railroad  securities  and  make 
them  a  desirable  investment. 

I  do  not  deny  that  in  the  construction  of  new  lines  of 
railroad,  especially  into  new  country,  it  has  been  neces- 
sary to  issue  bonus  stock  and  sell  railroad  securities 
much  below  par.  I  do  not  deny  that  this  has  tended  to 
develop  the  great  western  country,  to  furnish  it  lines  of 
transportation,  and  to  add  millions  to  the  wealth  of  the 
nation.  But  I  believe  the  time  is  coming  when  Con- 
gress should  reasonably  limit  the  inflation  and  manipu- 
lation of  railroad  securities,  in  order  that  their  stability 
may  be  insured  and  their  value  maintained.  Investors 
can  not  inquire  into  the  history  and  value  of  the  prop- 
erty and  the  basis  of  credit  of  all  railway  securities; 
they  must  accept  them  on  the  faith  of  their  earning 
capacity  and  the  integrity  of  the  management.  This 
regulation  should  not  be  unreasonable.  It  should  not 
hamper  the  capitalization  or  the  increase  of  capitaliza- 
tion of  railways;  it  should  not  retard  the  construction 
of  new  lines,  and  the  development  of  the  country;  but 
it  should  prevent  great  railway  systems,  which  are  to- 
day reasonably  capitalized  and  have  high  credit,  from 
being  shining  marks  of  manipulation  in  Wall  street  or 
any  other  financial  market.     That  is  what  I  say. 

The  entire  country  is  interested  in  the  stability  of 
these  investments.  It  should  be  a  matter  for  serious, 
not  hasty,  consideration.  Reasonable  regulations  should 
be  made  to  prevent  the  recurrence  of  such  a  system  of 
overcapitalization.  No  excuse  can  be  given  for  taking 
a  railroad  with  a  capital  that  is  small,  with  credit 
established,  which  is  in  a  position  to  extend  its  lines, 
to  make  additions,  acquire  equipment  and  terminals 


183 

necessary  to  do  the  business  of  the  country,  and  swell 
its  capital,  thereby  discounting  the  future  merely  for 
the  purpose  of  making  a  profit. 

Judge  Lovett  produced  some  figures  which  I  shall 
not  stop  to  comment  on  to  any  very  great  extent.  Fig- 
ures always  confuse  me.  But  he  credits  against  the 
cost  of  this  property  the  $32,000,000  of  bonds  at  80. 
We  have  shown  that  for  nearly  two  years  they  sold 
for  over  90. 

Mr.  LovETT.  It  is  merely  to  show  what  it  cost  them, 
what  it  stood  them  in. 

Mr.  Kellogg.  I  understand  that,  Mr.  Lovett;  $22,- 
000,000  of  3i  per  cent  bonds— $10,500,000  at  75— and 
they  sold  for  years  between  80  and  87  and  88;  $20,- 
000,000  of  preferred  stock  at  77,  and  the  Union  Pacific 
paid  86  within  the  last  two  years. 

Made  up  on  the  basis  of  $32,000,000  of  bonds  at  90, 
and  the  $22,000,000  of  bonds  at  85,  and  the  $20,000,000 
of  preferred  stock  at  86^,  and  the  common  stock  at 
38,  which  was  the  fair  average  price  for  two  or  three 
years  afterwards,  these  gentlemen  would  have  made 
sixteen  and  a  half  millions  instead  of  the  hypothetical 
sum  which  Judge  Lovett  figures  out  this  capitaliza- 
tion showed. 

But  that  is  merely  a  side  issue.  I  am  showing  what 
this  capitalization  was  used  for,  and  whether  the  Com- 
mission should  consider  this,  with  all  the  other  facts 
it  has,  and  its  knowledge  generally  of  railways  and 
capitalization,  in  making  any  recommendation  on  the 
question  of  the  capitalization  of  railways  in  the  future. 

There  is  another  thing  the  Commission  should  con- 
sider, and  that  is  the  system  of  bookkeeping  by  rail- 
roads. WTiat  becomes  of  these  dividends?  WTiy,  the 
counsel  says  they  were  openl}^,  notoriously  paid. 
Nobody  denied  it.  But  I  think  the  law  requires  that 
div^idends  should  be  repoited  to  this  Commission  in 
the  annual  reports;  and  that  30  per  cent  dividend,  I 
am  informed,  was  never  reported  to  the  Commission. 
It  is  not  in  the  annual  reports  to  the  Commission  at 
all,  and  not  shown.  The  $8,150,000  of  discount  on 
bonds  is  not  shown  in  the  reports  to  the  Commission 


184 

or  in  the  annual  reports  of  the  company;  and  Mr. 
Hillard  says  they  were  charged  against  this  $12,444,- 
176.66,  which  was  expenditures  uncapitalized,  in  order 
to  cover  it  up. 

Mr.  Cravath.  Are  you  speaking  of  the  discount  on 
the  bonds? 

Mr.  Kellogg.  Yes.  Whether  that  was  the  reason  or 
not 

Mr.  Cravath.  He  did  not  say  it  was  done.  He  said 
he  thought  it  would  have  that  effect. 

Mr.  Kellogg.  He  said  he  thought  it  would  have  that 
effect. 

Mr.  Cravath.  He  did  not  say  it  was  done. 

Mr.  Kellogg.  Perhaps  he  did  not  say  it  was  done, 
but  he  stated  it  would  have  that  effect.     [Reading:] 

"  Mr.  Kellogg.  But  charging  the  discount  on  bonds 
against  this  would  cover  it  up  on  the  books,  would  it 
not? 

"  Mr.  Hillard.  Yes. 

"  Mr.  Kellogg.  It  would  tend  to  obscure  it,  would  it 
not? 

"  Mr.  Hillard.  Yes ;  so  far  as  the  public  were  con- 
cerned. 

*'  Mr.  Kellogg.  It  would  cover  it  up.  so  far  as  any 
man  looking  over  the  books  was  concerned  ? 

''  Mr.  Hillard.  No  ;  any  man  looking  over  the  books 
would  see  it,  but  any  man  looking  over  the  annual 
reports  would  not," 

Of  course  the  public  do  not  look  over  the  books. 
They  look  over  the  annual  reports. 

"  Mr.  Kellogg.  Would  not  see  it  ? 

'•  Mr.  Hillard.  No  ;  he  would  not. 

'•  Mr.  Kellogg.  That  is  what  I  thought.  Then,  so 
far  as  the  annual  reports  made  to  the  stockholders  or 
the  public  is  concerned,  they  would  not  see  that  ? 

*'  Mr.  Hillard.  No ;  the}'  would  not  see  that." 

That  is  what  he  said. 

"What  is  this  $12,000,000  that  so  much  has  been  said 
about?  In  the  report  of  1899  to  the  Interstate  Com- 
merce Commission  there  appears  an  item  credited 
"  Construction  expenditures  uncapitalized,  $12,444,- 
176.66."  What  was  that  ?  These  gentlemen  went  back 
into  the  history  of  the  Alton  road ;  they  took  the  report 
made  ten  years  before  by  Mr.  Blackstone  to  his  stock- 


185 

holders,  in  which,  with  commendable  pride,  he  pointed 
out  to  them  that  the  Alton  road  was  worth  at  least 
$11,000,000  more  than  it  was  capitalized  for,  owing, 
partly  at  least,  to  the  losses  of  the  original  stockholders 
of  the  old  Joliet  and  Chicago  road,  which  had  been  fore- 
closed way  back  in  war  times  before  1863.  And  I  be- 
lieve that  this  is  the  first  time  I  have  ever  heard  of 
waiting  thirty  years  and  recapitalizing  losses  of  stock- 
holders of  another  road  made  in  foreclosure  proceed- 
ings years  before.  That  looks  to  me  somewhat  like 
robbing  the  gi*aveyard. 

Let  us  see  whether  I  am  correct  in  that.  I  would 
like  to  call  your  attention  for  a  moment  to  Mr.  Black- 
stone's  report  of  1898,  Well,  I  will  find  it  in  Mr.  Har- 
riman's  testimony,  page  66.  Here  is  what  Mr.  Black- 
stone  says: 

"  Taking  into  account  the  loss  sustained  by  the  origi- 
nal corporations  which  constructed  that  part  of  your 
lines  between  Joliet  and  Alton  and  operated  it  until 
it  passed  from  their  hands  to  yours  by  foreclosure  and 
sale  under  the  original  mortgages,  and  the  amount 
which  your  company  has  expended  for  additional  prop- 
erty not  represented  by  stocks  or  bonds,  we  find  not 
only  that  your  company  has  never  issued  a  share  of 
stock  or  an  obligation  of  any  kind  that  did  not  repre- 
sent at  its  par  value  an  equal  amount  of  cash  or  its 
full  equivalent  of  property  at  the  time  actually  re- 
ceived, but  also  that  the  original  cash  cost  of  your 
propertv,  as  nearlv  as  it  can  be  ascertained,  was 
$10,989,878.15,  or,  in  round  numbers,  $11,000,000,  more 
than  the  par  value  of  the  total  amount  of  stocks  and 
bonds  which  your  company  has  issued  or  assumed, 

"  To  ascertain  the  difference  between  the  original  cost, 
of  your  property  and  the  amount  of  stocks  and  bonds 
for  which  your  company  is  responsible  now  outstand- 
ing, $72o,0<)0  should  be  added  to  the  amount  above 
stated,  being  the  amount  of  bridge  and  sinking-fund 
bonds  since  paid  and  canceled,  in  place  of  which  no 
stock  or  bonds  have  been  issued." 

In  other  words,  they  paid  their  debts  and  canceled 
the  bonds;  and  these  gentlemen  took  the  losses  of  the 
original  stockholders,  money  expended  twenty  or  thirty 
years  ago  and  charged  off,  and  bonds  paid  and  can- 
celed, as  the  starting  point  of  their  recapitalization  of 
the  Chicago  &  Alton  Railway. 


186 

I  will  go  further  than  that.  I  say  that  they  not  only 
did  that,  but  they  took  from  that  time  on  the  annual 
appropriations  made  by  the  board  of  directors — who 
had  it  in  control,  and  who  were  entitled  to  speak  and 
had  the  authority  to  charge  it  off — they  took  the  annual 
sum  for  ten  years  which  had  been  spent  in  betterments 
and  improvement  of  that  property  to  keep  it  up  to  the 
standard  to  which  Mr.  Blackstone  thought  it  should  be 
kept  up,  and  they  took  that  and  added  it  to  the 
$11,000,000  and  made  $12,444,176.66. 

I  would  like  to  refer  *to  the  details  of  that,  because  I 
believe  that  that  sort  of  bookkeeping  is  not  lawful.  I 
do  not  mean  that  it  is  criminal;  I  mean  that  it  is  not 
lawful,  in  that  the  board  of  directors  had  disposed  of  it 
and  no  subsequent  board  of  directors  had  a  right,  in  my 
opinion,  to  repeal  those  resolutions,  to  dig  up  those 
amounts,  add  them  to  capitalization,  and  pay  it  out  in 
dividends,  or  charge  it  to  discount  on  bonds. 

On  pages  204  and  205  of  the  exhibits  of  Mr.  Hillard, 
who  is  now  the  comptroller  of  the  Alton,  will  be  found 
the  items  of  those  sums,  and  from  1889  down  to  1898  the 
annual  sums  appropriated  were  charged  off.  I  have 
all  the  reports  here.  I  will  not  stop  to  read  fhem,  but  I 
will  give  the  Commission  an  illustration.  For  instance, 
in  the  income  account,  after  the  payment  of  the  interest 
on  the  funded  debt  and  the  dividends  and  the  rentals 
each  year,  the  company  made  this  charge:  "Appro- 
priated from  this  account  for  additional  property,  real 
estate,  and  new  tracks,  $18,764.71."  Some  years  it  was 
more;  one  year  it  was  $238,000;  one  year  it  was  $32,000; 
another  year,  $26,000.  I  am  giving  round  numbers. 
Those  sums  had  been  annually  appropriated. 

Now,  I  deny  the  right  of  any  subsequent  board  of 
directoi-s  ten  years  later,  or  any  time  later,  after  the 
board  of  directors  has  passed  on  that  question,  to  take 
all  those  sums  and  capitalize  them  and  pay  them  out 
in  dividends.  We  all  know  that  every  railroad  which  is 
kept  up  to  the  standard  it  ought  to  be,  must  spend  a 
large  sum  of  money  in  betterments  which  are  not 
strictly  new  construction  and  should  not  be  charged  to 
capital  account.  Railroads  must  be  maintained,  and 
there  is  not  a  well-managed  railroad  in  the  United 


187 

States  that  undertakes  to  capitalize  every  dollar  spent 
for  betterments.  Every  well-managed  railroad  capi- 
talizes certain  amounts — new  construction,  usually 
double  tracking,  sometimes  additional  weight  of  rails — 
but  I  think  the  conservative  men  will  admit  that  it  is 
necessary  every  year  to  spend  a  large  sum  of  money 
which  is  in  the  nature  of  betterment  of  property,  in 
order  to  keep  it  up  to  the  standard ;  because  otherwise, 
if  you  capitalize  every  dollar,  the  time  will  come  when 
your  indebtedness  will  break  any  road  in  the  United 
States. 

At  least  I  deny  that  it  is  conservative  railroad  man- 
agement to  go  back  thirty  years,  take  the  losses  of  the 
original  stockholders,  take  all  the  money  used  during 
those  years  for  the  improvement  and  betterment  of  the 
railway,  and  charge  them  up  as  a  part  of  the  capital 
account,  borrow  money  on  a  mortgage  to' pay  it  back  to 
the  railway  company,  and  then  turn  around  and  pay  it 
out  to  themselves  in  dividends  and  in  profits  on  bonds 
sold  to  themselves  at  unreasonable  and  absurdly  low 
prices. 

Against  that  $12,444,177  they  charged  this  dividend 
of  $6,G69,180,  and  $8,155,751  of  discount  on  bonds. 
Now,  what  was  that?  It  was  not  the  discount  on  the 
$32,000,000  of  bonds  at  35,  which  would  be  the  ordi- 
nary way.  I  have  never  known — I  am  not  an  expert  in 
railroad  accounting,  but  I  have  never  before  known 
discount  on  bonds  to  be  charged  in  that  way.  But 
$8,155,000  for  some  reason  seems  to  have  been  charged 
as  discount  on  bonds,  as  against  $12,444,000 — I  can  not 
for  the  moment  think  for  any  other  reason  than  to 
cover  it  up.  That  probably,  I  suggest,  may  have  been 
profits  to  these  gentlemen  on  those  bonds.  Whether 
it  was  or  not,  it  is  certainly  a  discount  on  bonds  charged 
against  a  raked-up  old  account  of  the  Chicago  &  Al- 
ton for  construction  expenditures  uncapitalized  and 
losses  of  prior  stockholders, 

Mr.  Cravath.  Is  it  quite  fair  to  call  it  a  raked-up 
account,  inasmuch  as  the  Blackstone  management 
agreed  upon  the  advisability  of  carrying  those  expend- 
itures to  profits?  I  object  to  the  characterization; 
that  is  all. 


188 

Mr.  Kellogg.  I  think  it  is  fair.  I  do  not  care  what 
Mr.  Blackstone  said  he  was  going  to  do  about  making 
some  stock  dividends.  My  recollection  is  that  this  was 
said  by  Mr.  Blackstone  in  the  circular — and  I  am  per- 
fectly willing  that  the  circular  should  be  given  to  the 
Commission — to  prevent  their  selling  out  this  stock  to 
Mr.  Mitchell,  who  turned  it  over  to  Mr.  Harriman, 
Mr.  Schiff.  Mr.  Gould,  and  Mr.  Stillman. 

Mr.  Cravath.  That  was  the  time. 

Mr.  I\i:llogg.  That  was  the  time.  Mr.  Blackstone 
was  opposed  to  it,  and  he  did  send  out  a  circular.  I 
am  not  sure  whether  it  is  in  evidence  or  not,  but  I  am 
not  traveling  out  of  the  record  more  than  the  other 
gentlemen. 

Mr.  Cravath.  He  said  the  price  was  not  high  enough. 

Mr.  Kellogg.  He  said  the  price  was  not  high  enough ; 
and  he  said  everything  he  reasonably  could  to  prevent 
the  stockholders  selling  him  out  and  turning  him  out 
of  the  road.  He  said  that  he  would  distribute  a  stock 
dividend;  but  even  a  reasonable  stock  dividend  to  his 
stockholders  who  had  owned  this  property  all  those 
years,  while  it  might  not  have  been  legal,  and  while 
I  would  not  justify  it  at  this  day,  was  nothing  to 
compare  to  the  expansion  shown  by  this  transaction. 

A  few  words  more  on  that  point.  These  gentlemen, 
having  bought  the  Chicago  &  Alton  Railroad  stock,  or- 
ganized the  Chicago  &  Alton  Railway  Company.  They 
placed  their  stock  in  the  treasury  and  they  mortgaged  it 
for  $22,000,000.  That  transaction  took  this  form— 
and  I  do  not  deny  that  it  is  a  form  which  is  sometimes 
used  in  transferring  property  into  a  railroad  in  order 
to  get  out  the  securities — but  it  did  take  this  form. 
These  gentlemen  transferred  their  stock  to  Mr.  Louis 
Stanton  and  transferred,  or  at  least  nominally  trans- 
ferred, this  58  miles  of  road  to  Mr.  Stanton.  Mr.  Stan- 
ton made  a  proposition  to  the  new  Chicago  c'c  Alton 
Railway  Company  to  sell  it  34,722  shares  of  preferred 
stock,  which  had  cost  them  $6,944,400,  and  on  which 
they  had  received  a  dividend  of  $1,041,660,  leaving  a  net 
cost  of  $5,902,740 — they  proposed  to  sell  that  to  the  new 
company  for  $10,000,000  in  cash.  The  183.224  shares  of 
common  stock  which  they  had  bought,  which  had  cost 


189 

them  $32,064,200,  on  which  they  had  received  a  dividend 
of  $5,496,720,  they  proposed  to  sell  to  the  new  company 
for  390,318  shares  of  its  stock,  one-half  of  which  was 
preferred  and  one-half  common.  It  does  not  appear 
what  these  gentlemen  got  for  their  common  stock  or 
their  preferred  stock,  but  if  they  sold  it  for  anywhere 
near  the  market  price,  as  shown  by  the  table  which  Mr. 
Lovett  put  in  evidence,  they  must  have  made  a  very 
large  profit  on  this  transaction. 

Mr.  Severance.  When  was  the  30  per  cent  dividend? 

Mr.  Kellogg.  It  was  paid  May  9,  1900. 

Mr.  Severance.  Here  is  the  report  for  the  year  end- 
ing June  30,  1900. 

Mr.  Kellogg.  Mr.  Severance  calls  my  attention  to 
the  fact  that  the  annual  report  to  t^ie  Commission 
shows  7  per  cent  paid  on  the  common  stock  and  8f  on 
the  preferred  stock  of  the  Chicago  &  Alton  Railroad 
Company  and  no  30  per  cent  dividend.  That  certainly 
was  a  little  irregular. 

Mr.  Severance.  The  year  before  it  w^as  5^  per  cent 
on  each. 

Commissioner  Lane.  That  report  is  not  sworn  to, 
is  it? 

Mr.  Kellogg.  Yes,  sir.  The  reports  are  sworn  to 
by  the  comptroller,  I  think,  or  somebody. 

Mr.  Cravath.  Who  made  the  reports? 

Mr.  Kellogg.  It  is  made  by  the  Chicago  &  Alton 
Railroad  Company. 

Mr.  Cravath.  Who  was  the  auditor? 

Mr.  Kellogg.  I  do  not  know.     I  will  have  to  see. 

Mr.  Cravath.  Never  mind. 

Mr.  Kellogg.  I  am  not  sure  it  is  sworn  to,  either. 
And  it  is  possible,  I  say,  some  other  report  may  show  it. 

Mr.  Severance.  The  year  before  it  is  sworn  to  by 
Charles  H.  Chappell,  vice-president,  and  Charles  W. 
Davis,  auditor. 

Mr.  Kellogg.  Now,  they  were  to  get  $10,000,000  for 
this  stock  and  they  were  to  get  $3,000,000  for  the  rail- 
road, making  $13,000,000;  and  the  records  show  they 
sold  the  $22,000,000  of  bonds  for  $13,000,000.  But,  as 
a  matter  of  fact,  they  transferred  all  the  stock  and 
tU  the  bonds  for  the  securities. 


190 

Mr.  Cravath.  That  is  the  practical  effect. 

Mr.  Kellogg.  That  is  the  practical  effect.  But  the 
bonds,  if  sold  for  $13,000,000,  would  be  a  little  less 
than  60  cents  on  the  dollar,  and  they  never  sold  there- 
after at  anywhere  near  that  low  price;  in  fact,  they 
averaged  from  1900  down  to  the  present  time  from 
76^  to  86^,  and  during  the  two  or  three  years  after 
their  issue  they  sold  for  82^  to  86. 

There  was  the  issuance  of  $40,000,000  of  common 
stock  and  $22,000,000  of  bonds  which  have  been  put 
on  the  market  in  addition  to  the  $40,000,000  of  bonds, 
much  of  which  was  an  increase  of  the  capitalization 
of  this  compan}'. 

There  is  another  item  that  I  wish  very  briefly  to 
call  to  the  Commission's  attention,  and  that  is  the 
item  of  $973,477  of  funded  interest  account  which  was 
added  to  the  capital  of  this  road.  That  mortgage  was 
made  to  take  up  the  prior  bonds  and  coupons.  From 
June,  1901,  dow'n  to  1906,  there  was  carried  in  the 
treasury  of  the  Chicago  &  Alton  company  $973,477 
worth  of  the  coupons  of  its  prior  mortgage  bonds 
which  had  been  paid.  It  was  carried  as  an  asset  in  the 
treasury  of  the  Chicago  &  Alton  company.  I  take 
it  that  coupons  from  the  bonds  paid  with  that  mort- 
gage should  have  been  canceled,  and  were  not  legitimate 
assets  in  the  treasury.  As  a  matter  of  fact,  in  1905, 
after  having  carried  them  for  four  years  as  an  asset, 
they  were  charged  to  capital,  account. 

Again,  it  may  not  have  been  illegal,  but  it  was  bad 
business  to  mortgage  tliat  34  miles  of  road  in  process 
of  construction,  sell  all  the  bonds,  and  leave  no  way 
of  raising  funds  to  complete  it. 

Mr.  Ci^vvATH.  To  build  that  road? 

Mr.  I^LLOGQ.  To  build  that  road ;  yes.  As  a  matter 
of  fact,  when  the  new  management  took  hold  of  the 
Chicago  &  Alton  company  what  was  its  condition? 
After  having  expanded  its  securities  from  $33,000,000 
to  $114,000,000,  and  only  having  spent  $18,000,000  on 
the  property,  it  found  itself  confronted  with  the  neces- 
sity of  buying  additional  equipment,  and  was  com- 
pelled to  issue  $2,780,000  of  trust  certificates  to  do  so. 


191 

It  was  reduced  to  the  necessity  of  giving  its  equipment 
notes  in  order  to  obtain  the  facilities  with  which  to 
serve  the  public.  Xot  only  that,  but  it  had  no  money 
in  the  treasury,  and  no  way  of  raising  money,  to  com- 
plete the  34  miles  of  road  in  process  of  construction. 
Here  was  the  Alton  company,  with  all  its  splendid 
credit,  in  six  years  of  prosperous  times,  unable  to  meet 
its  demands,  after  this  enormous  recapitalization,  made 
(as  Mr.  Harriman  said)   to  meet  modern  conditions. 

Xow,  I  deny  the  necessity,  I  deny  the  morality,  and 
I  deny  that  it  is  good  financiering,  whether  it  was 
within  the  law  or  whether  it  was  not.  I  believe  this 
is  a  most  conspicuous  instance  of  taking  a  railroad 
with  a  splendid  credit,  with  low  capitalization,  making 
it  the  object  of  speculation,  for  the  purpose  of  increas- 
ing its  securities  and  unloading  them  on  the  public 
for  the  purpose  of  enriching  the  managers,  when  the 
earnings  of  the  road  do  not  and  can  not  justify  the 
increased  capitalization.  I  deny  that  it  is  necessary, 
and  I  believe  the  law  should  not  permit  such  transac- 
tion; that  the  law  should  require  that  money  bor- 
rowed be  used  for  corporate  purposes  of  construction 
and  acquisition  of  the  property,  improvement  of  the 
railway,  or  the  funding  of  prior  indebtedness,  and  that 
reasonable  restrictions  should  at  this  date  be  placed 
upon  the  unlimited  issue  of  securities  of  railroads. 

One  other  suggestion.  I  do  not  believe  that  it  is 
wise,  as  I  said  before,  that  unreasonable  restrictions 
should  be  placed  upon  the  acquisition  of  stocks  and 
securities  of  connecting  railways;  but  I  do  not  believe 
it  is  in  the  interest  of  the  railways  themselves,  or  of 
the  public,  that  they  should  be  allowed  to  become  great 
financial  investment  institutions,  dealing  in  the  stocks 
and  securities  of  other  railways.  Their  credit  should 
be  used  in  the  expansion  and  development  of  their  lines 
in  the  transportation  business  of  the  country.  Their 
securities  should  return  reasonable  and  generous  divi- 
dends. Their  credit  should  be  of  the  highest.  I  should 
deplore  action  or  legislation  which  would  hamper  them 
or  show  an  unreasonable  spirit  toward  their  expansion, 
for  the  expansion  of  the  railway  systems  of  the  country 
must  go  hand  in  hand  with  its  prosperity  and  its 
3568—07  M 13 


192 

development.  But  I  do  not  believe  that  the  enornious 
credit  of  railway  companies  should  be  used  for  the 
purpose  of  purchase  and  sale  of  securities  of  other 
lines  or  used  for  other  than  transportation  business, 
and  that  their  solvency  should  not  be  imperiled  by 
the  rise  and  fall  in  the  prices  of  stocks. 

Mr.  LovETT.  Just  one  word,  if  the  Commission  please. 
I  did  not  know  how  far  Mr.  Severance  expected  to  go 
in  his  discussion  of  the  purchase  of  the  stocks  of  the 
road;  but,  stopping  where  lie  did,  I  really  have  but 
a  few  words  to  say. 

No  one  has  suggested  that  those  purchases  were 
illegal.  I  do  not  understand  that  he  is  now  contend- 
ing that  they  were,  but  he  is  making  a  suggestion  that 
it  might  be  proper  for  Congress  to  prohibit  such  pur- 
chases in  the  future.  In  that  view  of  it,  that  is  a 
question  which  I  do  not  care  to  discuss.  It  is  a  legis- 
lative and  not  a  legal  question.  Whether  Congress 
has  that  power  or  not  is  a  very  grave  question,  and 
I  may  say  for  myself  that  I  do  not  believe  it  has  any 
such  power.  It  would  involve  a  change  in  the  struc- 
ture of  this  Government.  But  that  is  a  question  which 
I  do  not  care  to  discuss. 

The  purchases  were  simply  in  the  exercise  of  un- 
questioned powers  conferred  upon  these  corporations 
by  the  States  that  created  them,  and  there  is  no  law 
of  Congress  that  forbids  it  as  yet.  That  is  the  only 
interest  that  we  have. 

Commissioner  Clements.  Is  there  any  further  argu- 
ment to  be  offered  by  anyone? 

Gentlemen,  we  are  very  much  obliged  to  you  for  the 
full  and  fair  manner  in  which  you  have  discussed  this 
matter  before  the  Commission,  and  we  have  followed 
it  with  a  great  deal  of  interest.  The  matter  is  now 
at  a  point  where  the  Commission  will  take  it  under 
consideration,  subject  to  any  future  order  it  may  make 
in  the  premises.  With  that  understanding,  we  stand 
adjourned. 

The  Commission  thereupon,  at  4.15  p.  m.,  adjourned. 

O 


